Mba III Operations Management (10mba33) Notes

OPERATIONS MANAGEMENT
10MBA33
10MBA33
Syllabus
MODULE -1
Introduction and Break even analysis
Break even analysis- Break even analysis in terms of physical
units Sales value and percentage of full capacity
Break even for Multi Product situations
Capacity expansion decisions
Production process Make or Buy

decisions Equipment Selection decisions
Production process selection decisions
Managerial uses of break even analysis
Limitations of Breakeven analysis.
MODULE II
FORECASTING
Forecasting as a planning tool
Forecasting time horizon
Short and long range forecasting
Sources of data
Types of forecasting qualitative forecasting techniques
Quantitative forecasting modelsLinear regression
Moving average
Weighted moving average
Exponential smoothing
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Exponential smoothing with trends,

Measurement of errors
Monitoring and controlling forecasting models.
MODULE III
Facility planning
Facilities location decisions,
Factors affecting facility location decisions
Relative importance for different types of facilities.
Facility location models.
MODULE-IV
Employee productivity
Employee Productivity: - Productivity and work study
Productivity and the standard of living, Productivity and the organization
productivity, variables affecting lab our productivity, work content and time, work
study and related working conditions and human factors.
Method Study
Introduction ;to Method study, Data collection, recording, examining, and
improving work, Material flow and material handling study, Worker flow study,
worker area study.
Work measurement:Introduction to Work Measurement, Work sampling study, Time study and
setting standards. Numerical problems on productivity measurements, time study
and work standards.
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MODULE V
Capacity planning
Concept and overview of aggregation, demand and capacity options and strategies
in production and services, capacity and value, financial impact of capacity
decisions, aggregate planning types and procedure, capacity requirement planning,
concepts of yields (productivity) and its impact on capacity. Capacity requirement
planning, Materials requirement planning.
Planning hierarchies in operations, aggregate planning, purpose, necessity and
importance of aggregate planning, Managerial importance of aggregate plants,
alternatives for managing demand d and supply, capacity augmentation strategies,
Matching demand and capacity, demand chase aggregate planning, level
production aggregate planning, capacity planning and steps.
Resource requirements planning system, materials requirement planning,
objectives of MRP, BOM, benefits of MRP.
MODULE VI
MATERIALS MANAGEMENT
Role of Materials- Management materials and profitability, purchase functions,
procurement procedures including bid systems.
Vendor selection and development, vendor rating, ethics in purchasing. Roles and
responsibilities of purchase professionals, concepts of lead time, purchase
requisition, purchase order, amendments, and forms used and records maintained.
Inventory management, ABC VED, and FSN analysis,. Inventory costs, Inventory
models EOQ, safety stocks, Re order point, Quantity discounts.
Stores-types, functions, roles responsibilities, Inventory records,
Numerical. Problems on vendor rating, ABC analysis, Inventory models, discounts
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MODULE-VII
Quality management -1
Basic concepts of quality of products and services, dimensions of quality,
Relationships between quality, productivity, costs, cycle time and value. Juans
quality trilogy.
Impact of quality on costs-quality costs. Demings 14 principles. Quality
improvement and cost reduction- 7QC tools and 7 new QC tools, PDCA cycle,
Quality circles, quality Function Deployment and its benefits.
Quality systems- Need, benefits, linkage with generic strategies, ISO-9000- 2000
clauses, coverage, QS 9000 clauses, coverage, linkages with functional domains
like production marketing.
Six sigma concepts, organizing for continuous improvement. Excellence models,
awards and standards awards- MBNQA, Demings prize, Balbriggan award, their
main focus.
Role of management in implementing quality systems.
MODULE VIII
Quality management II
Control charts meaning and definition
Types of control charts
Control charts for variables
Control charts for attributes
Numerical problems on control charts
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CONTENTS
Module
Chapter Name
PAGE NOS.
6-11
Forecasting
12-28
Facility planning
29-36
37-44
Capacity planning
45-58
Materials management
59-71
Quality management I
72-90
91-98
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MODULE I
INTRODUCTION TO BREAK EVEN ANALYSIS:The term Operations refers to a function or system that transforms Inputs into
outputs of
a greater value. Operations are often defined as a Transformation or conversion process wherein
Inputs such as Materials, Machines, Labour and capital are transformed into outputs.
Operations management: - It is defined as the design, operation, and Improvement of the
systems that create and deliver the firms primary products and services.
FACTORS AFFECTING PRODUCTION AND OPERATIONS:a) Reality of Global competition.

b) Quality, Customer service and cost challenges.
c) Rapid Expansion of advanced production Technology.
d) Continued growth of service sector.
e) Scarcity of production resources.
f) Social responsibility Issues
PRODUCTIVITY:The term productivity describes how well a production manager achieves productivity use of the
resources of the firm. Productivity is an index or measure of the effective use of resource. It is
expresses as
out put
Input
Productivity measures includes:a) Labour productivity

b) Machine Productivity
c) Capital Productivity.
d) Energy Productivity.
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Competitiveness: - Competitiveness is a crucial factor in determining the survival and growth of

a firm. Competitiveness is how effectively an organization meets the needs of customers relative
to other firm which offer similar goods or services. The dimensions of competitiveness that
Measure the effectiveness of the production function are
a) Cost or price.
b) Quantity.
c) Product / service differentiation
d) Dependability as a supplier.
e) Flexibility.
f) Time to perform certain activities.
Break-Even analysis:Break even- analysis, also called profit analysis or cost-volume-profit (CVP) analysis is
used to determine the number of units of a product (volume) to sell or produce that will equate
total sales revenue with total production cost.
The three components of a break-even-analysis are volume, cost and profit.
Profit
Revenue cost
Of profit
TR (Total Revenue)
TC (Total Cost)
Loss
CV (Total variable cost)
C1 (Fixed Cost)
Quantity Q (B E Volume)
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Application of Break- Even analysis

a) Evaluating products or Services
Break Even analysis can be used to evaluate the profit potential of a new or existing
product or service. This technique provides answers to following Questions:a) Is the projected sales volume of the product service sufficient to break-even?
b) How low the variable cost must be per unit to break-even?
c) How low must the fixed cost be to break-even?
d) How do price levels affect the Break-even volume?
Q=
Where Q =
F=
P=
C=
F
P-C
Break Even Volume

Fixed Cost
Unit Selling Price
Variable Cost / Unit
b) Evaluating alternative Processes

(Make or buy)
Operations managers are faced with problem of choosing between two or more processes or
between an Internal Process (Make) and buying products / components from outside vendors
(buy) this is usually referred as Make or-buy decision.
The assumption is that either decision does not affect revenues. The operation manager must
study all the costs and advantage of each approach and find quantity at which total Costs equal to
Total revenues.
Fm -Fb
Q =
Cb - Cm
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Fm = Fixed cost for make option

Fb = Fixed cost for buy option
Cb = Variable cost for buy option.
Cm = Variable cost for make option.
B-E-point
Total cost (buy)
Cost
Total cost (make)
Fixed cost (make)
Fixed cost (buy)
Qty
Q (B.E.volume)
Break-Even analysis for Multi product cases
Most Manufacturers or sellers have a variety of offerings (goods or services). Each offering
may have different selling price and variable cost. B.E analysis can be used to reflect the
proportion of sales for each product. The formula uses the Weighting factor
indicating each
products contribution by its proportion of sales
F = Fixed cost
Vi = Variable cost / unit
P i= Unit selling price
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Wi = Percentage of sales of 1th product of Total Sales.
Major Process Decisions:
1. Process Choice- Determines whether resources are organized around products or processes
in order to implement the flow strategy. It depends on the volumes and degree of customization
to be provided.
2. Vertical Integration: - Is the degree to which a firms own production system handles the
entire supply chain starting from procurement of raw materials to distribution of finished goods.
3. Resource Flexibility: - Is the case with which equipments and workers can handle a wide
variety of products, levels of output, duties and functions.
4. Customers involvement:- Refers to the ways in which customers become part of production
process and the extent of their participation.
5. Capital Intensity:- Is the mix of equipment and Human Skills in a production process.
Capital Intensity will be high if the relative cost of equipment is high when compared to the cost
of Human Labour.
MANAGERIAL USES OF BREAK-EVEN ANALYSIS

1. It helps in arriving at the Fair value of the profits of the production firm.
2. It helps in understanding the relationship between costs, volume and profits.
3. It suggests the volume of sales required to earn the desired level of profit.
4. It helps in formulating the pricing policies for the firm.
5. It evaluates performance for the purpose of control.
6. It helps in understanding the effect of changes in sales mix on the profits.
7. It assists the management in taking strategic decisions such as make or buy, product add
or Drop, proper sales Mix, acceptance or rejection of an offer etc
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LIMITATIONS OF BREAK-EVEN ANALYSIS:1. The analysis assumes a linear revenue function and a linear cost function.
2. The analysis assumes that whatever is produced will be sold.
3. The analysis assumes that fixed and variables cost can be accurately Identified.
4. For multiple product analysis, the sales mix is assumed to be known and constant.
5. The selling price and costs are assumed to be known with certainty.
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MODULE II
FORECASTING
A Forecast is an Estimate about the future.
Forecasting: - It is defined as estimating the future demand for products and services
and the
resources necessary to produce and services and the resources necessary to produce these
outputs. Forecasting is the art and science of predicting future Events. It is not a mere guess or
prediction about the future without any rational basis. It involves Data processing and Data
mining Techniques to come out with conclusions which are more accurate and reliable.
Forecasting as a planning Tool:-
Managerial Decision making is often complicated due to an element of uncertainty in

variables affecting the Decision-making process. It is very important to device a Mechanism
which enables the planning process to happen more comprehensive by suitable Techniques.
Forecasting is that branch of operations Management which addresses such issues
provides the Manager with a set of Tools and Techniques for the Estimation Process.
Forecasts are Estimates of Timing and Magnitude of the occurrence of future events.
Key functions of Forecasting: It is an Estimation Tool.
A way of addressing the complex and uncertain environment surrounding business
decision-making.
A Tool for predicting events related to operations planning and control.
A vital prerequisite for the planning process in organization
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Why do we forecast?
1. We are operating in a Dynamic and complex Environment.
2. Short term fluctuations are seen is production systems.
3. To ensure Better Materials Management.
4. To Incorporate Rationalized Manpower decisions.
5. To establish a basis for planning & scheduling for strategic Decision making.
Forecast Time Horizon
The forecast Time Horizon can be classified into three sectionsa. Short-term
b.
MediumTerm c.
Longterm
Parameters
Short-term
Medium-term
Long-term
Duration
1 3 Months
12-18 Months
5-10 Years
nature of Decision
Purely tactical
Tactical as well as
Purely strategic
strategic
Considerations
Research Methods
Random (short-term effect)
Seasonal & cyclical
Long-term trends &
effects
business cycles
Extrapolation of Trends,
Collective opinion , Time
Technological
Judgment, Exponential
series ,Regression
Economic,
smoothing
Judgment
Demographic
Marketing studies
Judgment
nature of Data
Mostly Quantitative
Subjective and
Largely subjective
Quantitative
Degree of
Low
Significant
High
Revising qtly production
Annual production plan,
New product
Uncertainty
Examples
plan, rescheduling supplies
capacity augmentation,
Introduction,
of Raw Material
New Business
Facilities Location
Development
Decisions
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Sources of Data
Forecasting is often only as good as the quantity and quality of Data available.
1. Sales force Estimates: - The sales force constitutes sales representative and other field
operations staff. The information includes - Actual consumption
- Changing patterns in consumption
- Performance of competitor brands.
- Over all patterns in the Market share and Market growth.
Organizations can make end-use analysis. This data is very useful in short term forecasting and
mid- course corrections in production and sales planning.
2. Point of sales (POS) Data Systems:This system captures data at the point of sale using POS system. With this Technology, as
a customer buys a unit of an organizations product at a retail counter. The information is
captured and instantaneously transferred to a common data base. The organization shall
periodically analyse these data base for better Inventory management and sales planning. Eg,
Wat-mart.
3. Forecast from supply chain patterns:Distributors and Retailers form supply chain pattern obtaining POS data is often not easy.
Therefore it is necessary to rely on supply chain patterns to obtain actual data on actual sales
within a period. These estimates are crucial for accurate forecasting pf future Demand.
4. Trade Industry Association Journals:These are handy in case of Long-term forecasting. They provide syndicated and
researched data pertaining to the sector in which the organization is operating. Several Market
Research firms such as ORG- MARG and Management consultancy firms also provide classified
Information.
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5. B2B portals / Market places:B2B (Business 2 Business) portals provide necessary information about companys
profile, product range, Market share, latest developments in R & D and other vital inputs about
Market. Internet is the best source of B2B inputs.
6. Economic surveys and Indicators:Macro Economic Trends indicate the emerging Trends in consumption patterns of several
classes of goods and services.
Eg, HDTV (High Definition TVs)
Demand for HDTV are influenced by
Income level distribution in the population.
Prevailing taxation policies.
Disposable Income.
Literary levels.
Rate of urbanization.
For Economic surveys.
a) Central statistical organization (CSO)
Centre for Monitoring Indian Economy (CMIE)
TYPES OF FORECASTING:a) Technological Forecasts.
b) Economic Forecasts.
c) Demand Forecasts.
a)
Technological Forecasts: - are concerned with rates of Technological Progress.
Technological charges will provide many companies with new products and materials to offer for
sale. Even if the products can be developed with a new or improved technology using machinery
and equipment.
b) Economic forecasts: - are statements of expected future business conditions published by

government agencies. These forecasts address the business cycle by predicting. Inflation rates,
Money supplies, Housing Statistics and other Economic Indicators such as Tax revenues, level of
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employment, GNP. These forecasts give ideas about long range intermediate range business
growth to business organizations.
c) Demand Forecasts:- are projections of Demand for a companys product or services. These
forecasts are also called a sales forecast which gives the expected level of Demand for a
companys goods or services throughout some future period and usually provide the basis for
companys planning and control decisions.
Forecasting Approaches
1. Qualitative Approach
2. Quantitative Approach.
Forecasting
Approach
Qualitative Approach
Quantitative approach
Time series Model
Casual Methods
Jury of Executive opinion Sales
Nave approach
Trend projection
force composite Method Market
Moving averages
Research Method Delphi
Exponential smoothing Correlation

Method
Technique
linear regression
a) Jury of Executive Opinion: - It is a forecasting Technique in which the opinions of a

small group of high-level executives (Managers) are taken. Based on which a group
estimate of demand is obtained as the forecast.
Advantages:1. Uses experience and knowledge of experts.

2. Can be used for Technological forecasting.
3. Can be used for forecasting demand for new product.
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4. Can be used to modify existing forecast to account for unusual

circumstances.
Disadvantages:1. It is costly process.

2. It sometimes gets out of control or gets delayed.
3. Difficult to obtain consensus opinion of several experts.
b) Sales Composite Method: - This is also known as pooled sales force estimate. Each
sales
person estimates what sales will be in his / her territory. These estimates are then reviewed to
ensure that they are realistic.
Advantages:-
This is more practical, realistic and updated information.
It helps in Inventory Management, distribution and sales force staffing.
Disadvantages:-
It may affect the sales forecast.
Sales people may be unable to distinguish between what customers would like
to do and what they actually will do.
Sales people may be overly influenced by their recent experiences.
Market Research Methods (Consumer Survey Method)

This is a systematic approach to determine consumer interest in a product or service by
conducting a consumer survey and sample consumer opinions. This method may be used to
forecast Demand for he short, Medium and long term.
Advantages:This is better compared to sales force composite method as the customers directly gives their
opinion.
This information is more primary in nature and cannot be obtained in other methods.
Disadvantages:1. It is time consuming.

2. It is very costly affair / Expensive.
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3. The response rate for Mailed Questionnaire is very poor.

4. The survey result may not reflect the opinions of the market.
1. Delphi Method: - In this method opinions are solicited from a number of other managers and
staff personnel. The decision makers consist of group of 5 to 10 experts who will be making
actual forecast. The staff personnel assist decision makers by preparing, distributing, collecting
and summarizing a series of questionnaires and survey results.
The managers whose judgments are valid are the respondents. This group provides input
to the decision makers before forecast is made. Response of each respondent are kept anonymous
which tends to encourage honest responses. Each new questionnaire developed using the
information extracted from the previous ones. Thus enlarging the scope of information on which
participants can base their judgment. The goal is to achieve consensus forecast.
Advantages:-
This method can be used for long-range forecast product demand.
A panel of experts may be used as participants.
Disadvantages:-
Process can take a long time.
Responses may be less Meaningful.
High accuracy may not be possible.
Poorly designed Questionnaire will result in ambiguous or false conclusions.
Quantitative Approach:-
Nave Approach: - The simplest way to forecast is to assume that forecast of Demand in the
next period is equal to the actual Demand in the most recent period.
Eg. If the demand for a product in Jan 2009 is 160. Then demand for the product in Feb-2009
is also 160.
Moving averages Method:(i) Simple Moving average.

(ii) Weighted Moving average.
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Demand in previous n periods

Moving average =
n
ii) Exponential smoothing Method
It is a sophisticated weighted moving average method that is still relatively easy to
understand and use. It requires three items of data
-
This periods forecast.
Actual Demand for the period.
Smoothing constant.
Ft = F t-1 + (A t-1 + F t-1)

Ft = Forecast for the period t
F t-1 = Forecast for the previous period (t-1)
= Smoothing constant (0.05 0.5)
A t-1 = Actual Demand for the previous period.

Exponential smoothing with trend Adjustment.
F I T (t) = Ft + Tt
F I T = Forecast Including trend.
Ft
= exponentially smoothed forecast.
Tt
= exponentially smoothed trend.
Ft = (At-1) + (1- ) (F t-1 + T t-1)
(Ft Ft-1) + (1- ) (Tt-1)
Tt =
Forecast Error (FE)
FE= Actual Demand Forecast Demand.

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Mean Absolute Deviation (MAD)

MAD = (forecast errors)
MONITORING AND CONTROLLING FORCASTS
Once a forecast has been completed, its need to be monitored and corrected periodically by
determining why actual demand differed significantly from that projected. This can be done by
setting upper and lower limits on how much the performance characteristic of a forecasting
model can deteriate before we change the parameters of the model
TRACKING SIGNAL
A measurement of how well the forecast is predicting actual values.
Tracking signal=
Running sum of forecast errors

Mean absolute deviation
Four possible components:

Trend (secular trend) -- Long term pattern or direction of the time series
Cycle ( cyclical effect) -- Wavelike pattern that varies about the long-term trend, appears over a
number of years e.g. business cycles of economic boom when the cycle lies above the trend line
and economic recession when the cycle lies below the secular trend.
Seasonal variation -- Cycles that occur over short periods of time, normally < 1
year e.g. monthly, weekly, daily.
Random variation (residual effect) --Random or irregular variation that a time series shows
Could be additive: Yi = Ti + Ci + Si + Ii
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Or
Multiplicative: Yi = Ti x Ci x Si xI
Forecasting using smoothing techniques
The two commonly used smoothing techniques for removing random variation from a time
series are moving averages and exponential smoothing.
Moving average: (MA)
Moving averages involve averaging the time series over a specified number of periods. We
usually choose odd number of periods so we can center the averages at particular periods for
graphing purposes. If we use an even period, we may center the averages by finding two-period
moving averages of the moving averages. Moving averages aid in identifying the secular trend of
a time series because the averaging modifies the effect of cyclical or seasonal variation. i.e. a
plot of the moving averages yields a smooth time series curve that clearly shows the long
term
trend and clearly shows the effect of averaging out the random variations to reveal the trend.
Moving averages are not restricted to any periods or points. For example, you may wish to
calculate a 7-point moving average for daily data, a 12-point moving average for monthly data,
or a 5-point moving average for yearly data. Although the choice of the number of points is
arbitrary, you should search for the number N that yields a smooth series, but is not so large that
many points at the end of the series are "lost." The method of forecasting with a general L-point
moving average is outlined below where L is the length of the period.
Forecasting Using an L-Point Moving Average
1. Select L, the number of consecutive time series values Y1, Y2. . . YL

that will be averaged. (The time series values must be equally spaced.)
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2. Calculate the L-point moving total, by summing the time series values over L adjacent time
periods.
3. Compute the L-point moving average, MA, by dividing the corresponding moving total by L
4. Graph the moving average MA on the vertical axis with time i on the horizontal axis. (This
plot should reveal a smooth curve that identifies the long-term trend of the time series.)
Extend the graph to a future time period to obtain the forecasted value of MA
Exponential smoothing:
One problem with using a moving average to forecast future values of a time series is that values
at the ends of the series are lost, thereby requiring that we subjectively extend the graph of the
moving average into the future. No exact calculation of a forecast is available since the moving
average at a future time period t requires that we know one or more future values of the series.
Exponential smoothing is a technique that leads to forecasts that can be explicitly calculated.
Like the moving average method, exponential smoothing de-emphasizes (or smoothes) most of
the residual effects.
To obtain an exponentially smoothed time series, we first need to choose a weight W, between
0 and 1, called the exponential smoothing constant. The exponentially smoothed series, denoted
Ei, is then calculated as follows:
Ei= W Yi+(1- W)Ei-1 (for i>=2)
where Ei = exponentially smoothed time series
Yi = observed value of the time series at time i

Ei-1 = exponentially smoothed time series at time i-1
W = smoothing constant, where 0<= W <=1
Begin by setting E1=Y1
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E2= W Y2+(1- W)E1

E3= W Y3+(1- W)E
Ei= W Yi+(1- W)Ei-1
You can see that the exponentially smoothed value at time i is simply a weighted average of the
current time series value, Yi, and the exponentially smoothed value at the previous time period,
Ei-1. Smaller values of W give less weight to the current value, Yi. Whereas larger values give
more weight to Yi
The formula indicates that the smoothed time series in period i depends on all the
previous observations of the time series.
The smoothing constant W is chosen on the basis of how much smoothing is required. A
small value of W produces a great deal of smoothing. A large value of W results in very little
smoothing.
Exponential smoothing helps to remove random variation in a time series. Because it uses the
past and current values of the series, it is useful for forecasting time series. The objective of the
time series analysis is to forecast the next value of the series, Fi+1. The exponentially smoothed
forecast for Fi+1= Ei
where Ei= W Yi+(1- W)Ei-1
is the forecast of Yi+1 since the exponential smoothing model assumed that the time series has
little or no trend or seasonal component. The forecast Fi is used to forecast not only Yi+1 but
also all future value of Yi.
i.e. Fi = W Yi+(1- W)Ei-1, i = n + 1, n + 2, . . .
Forecasting: The Regression Approach

Many firms use past sales to forecast future sales. Suppose a wholesale distributor of
sporting goods is interested in forecasting its sales revenue for each of the
next 5
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years. Since an inaccurate forecast may have dire consequences to the distributor, some
measure of the forecasts reliability is required. To make such forecasts and assess their
reliability, an inferential time series forecasting model must be constructed. The
familiar general linear regression model represents one type of inferential model since
it allows us to calculate prediction intervals for the forecasts.
YEAR SALES YEAR SALES
YEAR SALES
4.8
13
48.4
25
100.3
4.0
14
61.6
26
111.7
5.5
15
65.6
27
108.2
15.6
16
71.4
28
115.5
23.1
17
83.4
29
119.2
23.3
18
93.6
30
125.2
31.4
19
94.2
31
136.3
46.0
20
85.4
32
146.8
46.1
21
86.2
33
146.1
10
41.9
22
89.9
34
151.4
11
45.5
23
89.2
35
150.9
12
53 5
24
99.1
To illustrate the technique of forecasting with regression, consider the data in the Table above.
The data are annual sales (in thousands of dollars) for a firm (say, the sporting goods distributor)
in each of its 35 years of operation.
A scatter plot of the data is shown below and reveals a linearly increasing trend,
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ANNUAL SALES
160
Sales
140
120
100
80
SALES y
60
40
20
20
40
YEARS
So the first order (straight-line) model

E(Yi) = o + 1i
Seems plausible for describing the secular trend. The regression analysis printout for the model
2
gives R = .98, F = 1,615.724 (p-value < .0001), and s = 6.38524. The least squares prediction
equation is
Yi = Bo + B1i = .401513 + 4.295630i
The prediction intervals for i = 36, 37. . . 40 widen as we attempt to forecast farther into the
future. Intuitively, we know that the farther into the future we forecast, the less certain we are of
the accuracy of the forecast since some unexpected change in business and economic conditions
may make the model inappropriate. Since we have less confidence in the forecast for, say, i = 40
than for t =-36, it follows that the prediction interval for i = 40 must be wider to attain a 95%
level of confidence. For this reason, time series forecasting (regardless of the forecasting
method) is generally confined to the short term.
Multiple regression models can also be used to forecast future values of a time series with
seasonal variation. We illustrate with an example.
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E XAM PLE
Refer to the 1991-1994 quarterly power loads listed in the attached Table .
a. Propose a model for quarterly power load, y`, that will account for both the secular trend
and seasonal variation present in the series.
b. Fit the model to the data, and use the least squares prediction equation to forecast the
utility company's quarterly power loads in 1995. Construct 95% confidence intervals for
the forecasts.
Solution
a. A common way to describe seasonal differences in a time series is with dummy variables. For
quarterly data, a model that includes both trend and seasonal components is
E(Yi) = Bo + Bli
Trend
+ B2X1 + B3X2 + B4X3
Seasonal component
where
i = Time period, ranging from i = 1 for quarter I of 1991 to i = 16 for quarter IV of 1994
Yi = Power load (megawatts) in time i
X1_= 1 if quarter I
O if not
X3 =1 if quarter III
X2 =1 if quarter II
O if not
Base level = quarter IV
O if not
The coefficients associated with the seasonal dummy variables determine the mean increase (or
decrease) in power load for each quarter, relative to the base level quarter, quarter IV.
b. The model is fitted to the data using the SAS multiple regression routine. The resulting SAS
2
printout is shown below. Note that the model appears to fit the data quite well: R = .9972,
indicating that the model accounts for 99.7% of the sample variation in power loads over the 4year period; F = 968.962 strongly supports the hypothesis that the model has predictive utility (pvalue = .0001); and the standard deviation, Root MSE = 1.53242, implies that the model
predictions will usually be accurate to within approximately +2(1.53), or about +3.06 megawatts.
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Forecasts and corresponding 95% prediction intervals for the 1995 power loads are reported in
the bottom portion of the printout . For example, the forecast for power load in quarter I of 1995
is 184.7 megawatts with the 95% prediction interval (180.5, 188.9). Therefore, using a 95% prediction interval, we expect the power load in quarter I of 1995 to fall between 180.5 and 188.9
megawatts. Recall from the Table that the actual 1995 quarterly power loads are 181.5, 175.2,
195.0 and189.3, respectively. Note that each of these falls within its respective 95% prediction
interval shown.
Many descriptive forecasting techniques have proved their merit by providing good forecasts
for particular applications. Nevertheless, the advantage of forecasting using the regression
approach is clear: Regression analysis provides us with a measure of reliability for each forecast
through prediction intervals. However, there are two problems associated with forecasting time
series using a multiple regression model.
PROBLEM 1 We are using the least squares prediction equation to forecast values outside the
region of observation of the independent variable, t. For example, suppose we are forecasting for
values of t between 17 and 20 (the four quarters of 1995), even though the observed power loads
are for t values between 1 and 16. As noted earlier, it is risky to use a least squares regression
model for prediction outside the range of the observed data because some unusual change
economic, political, etc.may make the model inappropriate for predicting future events.
Because forecasting always involves predictions about future values of a time series, this
problem obviously cannot be avoided. However, it is important that the forecaster recognize the
dangers of this type of prediction.
PROBLEM 2 Recall the standard assumptions made about the random error component of a
multiple regression model . We assume that the errors have mean 0, constant variance, normal
probability distributions, and are independent. The latter assumption is often violated in time
series that exhibit short term trends. As an illustration, refer to the plot of the sales revenue data.
Notice that the observed sales tend to deviate about the least squares line in positive and negative
runs. That is, if the difference between the observed sales and predicted sales in year t is positive
(or negative), the difference in year t + 1 tends to be positive (or negative). Since the variation in
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the yearly sales is systematic, the implication is that the errors are correlated. Violation of this
standard regression assumption could lead to unreliable forecasts.
Measuring forecast accuracy (MAD)
Forecast error is defined as the actual value of the series at time i minus the forecast
value,
i.e. Yi - i. This can be used to evaluate the accuracy of the forecast. Two of
the procedures for the evaluation are to find the mean absolute deviation
MAD= | Yi - i | /N and (2) RMSE= ( Yi - i)2 /N
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MODULE 3
Facility planning
FACTORS AFFECTING LOCATION DECISIONS
DECIDING ON DOMESTIC / INTERNATIONAL LOCATION:
-Political stability
-Export or Import quotas
-Exchange rates
-Cultural and economic considerations
-availability of natural resources
-cost of labour.
REGIONAL LOCATION DECISION:
-
Availability of raw materials.

Nearness to source of raw materials
Nearness to market
Proximity to suppliers
Availability of power
Transport facilities
Suitability of climate
Govt. Policy
Competition between states.
SELECTION OF COMMUNITY
-
Availability of labour
Civic amenities for employees
Existence of complementary, ancillary and competing industries.
Finance & Research facilities.
Availability of water
Availability of fire fighting services

Local Taxes & Restrictions.
SELECTION OF EXACT SITE

-
Area of land available

Topography
Cost of land
Disposal of waste
Community attitude.
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RELATIVE IMPORTANCE OF LOCATION FACTORS;

Location factors need to be prioritized to ensure better selection process. The following
statistics provides information relative importance of each factor in deciding an ideal location.
Factors
Personal business contacts in particular region
Good communication / Transport facilities
Availability of sufficient Infrastructure
Market Research Indicating size or other benefits of
local market
Availability of skilled labour
Regions promotion efforts
Particulars local / Regional policies to attract
business
Lack of Information on other potential areas
Unimporta
nt
(%)
Neutral Important
(%)
(%)
24
53
47
58
11
21
20
16
65
26
33
26
70
83
81
15
13
9
15
14
10
78
14
Facility Location Models:1.

2.
3.
4.
Factor Raging Method.

Point Rating Method.
Break-even analysis
Qualitative Factor analysis.
a) Factor Rating Method:Factor Rating Method Involves giving rating to each factors based on its important factor ratings
are used to evaluate alternative locations.
Advantages:-
It facilitates communication about why one location / site is better than another.
Enables bringing diverse locational considerations into the evaluation process.
Foster consistency of Judgment about location alternatives.
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b) Point Rating Method:In this method, the relative weight a company assigns to each objective or to each of
points a perfect site would receive in each category. Each potential site is then evaluated with
respect to every factor a company is looking for and points are assigned for each factor. The site
with the highest total No. of points is considered superior to other sites.
The draw back of this method is that high score in any factor can overcome a low score is
any other factor.
Break-Even analysis:Locational Break- Even analysis is the use of cost-profit-analysis to make an economic
comparison of location alternatives. By identifying fixed and variable costs and drawing the
graphs of quantity Vs. Total costs for each location; we can determine the location which has the
lowest cost over a range of volume produced. Locational Break-even-analysis can be done
mathematically or graphically.
Qualitative Factor Method:If economic criteria (cost, revenue or profits) alone are not sufficiently influential to
determine the location alternative, a system of assigning weights to qualitative factors separately
and combining them to arrive at a total score is useful in making the location decision. This
approach in known as qualitative factor analysis method.
Facility Layout Planning:Facilities Layout refers to the configuration of Departments, work centers and equipment
and Machinery with focus on the flow of Materials or work through the production system.
Facility layout- Means planning for location of all machines, equipments, utilities, works
to customer service areas, Material storage areas, tool serving areas etc., and also planning for
the patterns of flow of Materials and people around into and within the buildings.
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Objectives of a Good plant layout:1. Higher utilization of space, equipment and people.
2. Improved flow of Materials, Information and place
3. Improved employee morale and safe working condition.
4. Higher flexibility.
5. Improved production capacity.
6. Reducing material handling costs.
7. Reduced congestion or reduced bottleneck centers.
8. Reduced Health Hazard and accidents.
9. To provide ease of supervision.
10. To improve productivity.
11. To allow ease of maintenance.
12. To facilitate better supervision.
13. To utilize available space efficiency and effects.
Factors Influencing Layout changes:-
Primarily the layout of a plant is influenced by the relationship among materials,

machinery and men. Other factors as follows:-
1. Materials: - Plant layout includes provision for storage and handling of raw materials,
supplies and components used in production.
2. Product: - The type of product whether product is light or Heavy, big or small, solid or liquid
Eg. Ship building, Aircraft assembly, Locomotive assembly etc.,
3. Workers: - The Gender of employees (Men/ Women) the position of employees while
working (standing / sitting) employee facilities etc.,
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Machinery and Equipments: - Type of product, volume of production, Type of processes

determines type of Machines and equipments to be installed e.g., CNC Machines, lathe
Machines, Automation Techniques, Robotics etc.,
5. Type of Industry: - Industries can be classified as - Synthetic Industry
- Analytical industry
- Conditioning Industry.
- Extraction Industries.
6. Location: - The size and terrain of the site selected for the plant influences the type of
buildings which in turn influences the layout design.
7. Managerial policies: - Regarding volume of production, provision for future expansion,

extent of automation, Make-or-buy decisions. Speed of delivery of goods to customers,
purchasing and Inventory policies and personnel policies influence plant layout design.
Types of plant layout:1. Process layout.
2. Product layout.
3. Fixed position layout.
4. Cellular manufacturing layout.
5. Hybrid Layout.
1. Process layout: - It is also called as job shop or Functional Layout. The Machines and
equipments of similar type are grouped together and placed in one location in the process layout.
All metal cutting equipment like back saw, circular sewing machines, Lathe & turning
machines, Milling Machines, gas cutting Machines, welding Machines will be clustered in group
and housed in separate Location. These are usually called Turning shop, milling shop Gear shop
and Lubrication shop. Etc., sequencing of shops is generally as per a typical product.
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The product is given secondary consideration and the process is more important. This
configuration is good for job orders.
Example: - Hospitals.
Advantages:Break down of Machines does not stop the entire production.
The existing machines can be fully utilized production flexibility is possible without any changes
in Machines.
Special skills can be developed in workers job insensitive schemes can be developed.
Disadvantages:-
Large Inventories and consequent cost increase line balancing is not possible.
Processing time Increases due to ling travels.
Production planning and control is difficult.
It is difficult incentive schemes.
Product layout:A product layout or straight line layout is a single product oriented layout
appropriate for a standardized product and for large volume production the facilities are laid out
such that each equipment gives a specialized service of sequence of task. In this system the
product passes through all the Machines in a sequence.
Example: - Pharma tab letting, bottling of beverages, car Manufacture, scooter / bike
Manufacture, car washers, cafeterias etc.,

Advantages:-
Less material handling due to straight Line movement of Materials.
Idleness
and
Idle
capacity
is
removed
by
Maximum space utilization.

-
Easy to control production volumes and quality.
Does not require frequent Machine set up.
Scheduling, routing and Managing in process Inventories are simple.
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Disadvantages:-
Breakdown of one machine in Line stops entire process.
Benefits of skills of good supervisor cannot be used.
Change of product or volume change brings problems of utilization of large resources.
The system is Inflexible.
Fixed position layout:As the term itself implies, the fixed position layout involves the movement of men, and
machines to the product which remains stationary. In this type of layout, the material or major
component remains in a fixed location and tools, machinery and men as well as other pieces of
material are brought to this location. It is also called as static layout; this type is normally used in
the manufacture of bulky and heavy products.
Ex: locomotives, ships, aircraft, submarines, spacecrafts, boilers etc.
Advantages
-
Men and machines can be used for a wide variety of operations.
In investment on layout is very small.
Cost of Transporting bulky items can be avoided.
4) Cellular manufacturing layout (CM)

In cellular manufacturing (CM) machines are grouped into cells, and the cells function
somewhat like a product layout within a larger shop or process layout. Each cell in CM layout is
formed to produce a single parts family- a few parts, all with common characteristics, which
usually means that they require same machines and have similar Machines settings.
Ex: - Gear shop, watch outer casing shop.
Advantages:
-
Lower work-in progress Inventory
Reduced material handling cost
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Shorter flow times in production
Simplified production planning
Improved visual control
Quality tends to improve
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Disadvantages
-
Reduced manufacturing flexibility
Potentially increased machine down time
Duplicate pieces of equipment may be needed so that parts need not be transported
between cells.
5) Hybrid layout
Generally manufacturing layouts are a combination of process and product layout these are
called Hybrid Layout. The Departments are arranged as per processes but the product flow
through on a product layout. In a mixed layout a good compromise is made of a process and a
product layout to get benefits of both type as applied to a specific product.
Product layout may be separated to some extent. Product line due to process heat, fumes
bad smell etc. which need special treatment maximum use of capacity of machines and space
available. This is done by diversification of product layout for main product and process layout
for joint or by products space constraints and production at different locations brings is hybrid
layouts to avoid large in process inventories.
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MODULE-4
Productivity:- Productivity is the relationship between the output of an organization and inputs
required to produce these outputs. Productivity is expressed as the ratio of output to sum or all of
the resources used to produce the output.
Productivity = Output / input

Labor productivity = Units produced / Hours worked
Capital productivity = output/capital input
Material productivity = output/material input
Machines productivity = output/machine hours input
Total productivity = output/labour+material+energy+capital.
Factors affecting productivity
1. Technology
2. Capital investment
3. Quality of products and services
4. Process or methods
5. Management.
6. Standardization of process
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7. Quality differences
8. Employee attitude
9.
Union activity
10. Power shortage

11. Labor turnover
12. Govt. policies and regulations
13. Work place design.
14. Plant layout and process.
15. Plant maintenance.
Productivity improvement Techniques
1) Employee based technique: which includes financial incentives. Fringe benefits, promotion,
policies, job enrichment, employee participation in management employee training and
education.
2) Material based techniques: such as inventory planning and control. Material requirement
planning material handling system, quality control etc.
3) Task based Techniques: such as engineering, work measurement, job design, job evaluation
and human factor engineering.
4)
Products based techniques: such as product standardization, simplification and
diversification, product reliability, advertising and promotion, value analysis, research and
development.
5) Technology based Techniques: (based on computer engineering) such as Robotics, CAD,
CAM, electronic data processing, group technology. Flexible manufacturing, total product
maintenance, machine reconditioning etc.
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Work Study
Work study is defined as that body of knowledge concerned with the analysis of the work
methods and the equipment used in performing a job. The design of an optimum work method
and the standardization of proposed work methods.
Objectives of Work study:
1) To improve productivity of current jobs and maximize productivity.
2) To reduce waste through standardization of work elements of job.
3) To increase industrial productivity through job satisfaction.
4) To improve labour efficiency
5)
To enable optimal utilization of plant
6)
To ensure most effective utilization of human effort.
7)
To determine efficient work methods
8)
To evaluate human effort
9)
To establish standards of performance for employers.
Work study procedure

1) Select the work to be measured.
2) Record all the relevant facts about the job or process.

3) Examine critically all recorded facts, questioning the purpose, place to eliminate ineffective
time.
4) Develop a new method for job/process
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5) Measure the work content and establish the standard time using an appropriate work
measurement technique.
6) Define the new method for the job.
7) Maintain the new method for job/process/operation.
Benefits Of work study
-
Increased productivity and operational efficiency
Reduced manufacturing costs
Improved work place layout
Fair wages to employees
Improved work flow
Reduced material handling cost
Better man power planning
Better working conditions to employees.
Method study
-
Method study is a scientific technique of observing, recording and critically examining

the present method of performing a task or job or operation with the aim of improving the
present method and developing a new and cheaper method.

Objectives of Method study
- To study the existing proposed method of doing any job operation or activity
- To develop on improved method.
- To improve utilization of resources.
40
- To eliminate wasteful and inefficient motions.

- To standardize work network / processes.
Advantages of Method Study:Work simplification.
Improved Working Method.
Better Product quality.
Improved workplace layout.
Improved equipment design.
Improved work flow.
Higher safety to workmen.
Shorter Production cycle time.
Reduced material consumption & wastages
Reduced manufacturing costs.
Method study procedure:
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1. Select: - The work or job to be studied and define the objectives to be achieved by the
method study. The job selected to have max economic advantage.
2. Record:- all the relevant facts or information pertaining to the existing methods using
recording Techniques such as
a. Process charts: -
Outline process chart.
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Operation process Chart.

Man-Machine Chart.
Multiple-activity chart.
Motion chart.
SIMO chart.
Two handed process chart.
b. Diagrams: - Flow diagram.
String diagram.
Cycle graph.
Chronocycli graph.
3. Examine: - the recorded facts critically challenging everything being done and seeking
alternatives, questioning the purpose, the means, sequence, place and the person.
4. Develop: - the improved method by generating several alternatives and selecting the best
method. The factors to be considered are:
Cost of implementation.
Expected savings.
Feasibility.
Productivity.
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5. Install: - The improved method in three phases- planning, arranging and implementing
phases.
6. Maintain: - New method by ensuring that the installed method is functioning well. This is
done by periodic checks and verification at regular intervals. Proper control procedures are used
to ensure that the new method is preached to achieve the benefit.
Work Measurement:Work measurement is defined as application of Techniques designated to establish the

work content of a specified task by determining the time required for carrying out the task at a
defined standard of performance by a qualified worker.
Objectives of work measurement
Improved planning and control of activities
More efficient manning of plant
Reliable indices for labor performance
Reliable basis for labour cost control
Basis for sound incentive schemes.
Steps in work measurement

Break the job into elements.
Record the observed time for each element by time study
Establish elemental values by extending observed time into normal time.
Assess relaxation allowance for personal needs and physical and mental fatigue.
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Add the relaxation allowance time to normal time.

Determine the frequency of occurrence of each element in the job.
Observed time
Normal time
Work content
Standard time
Time study
Time study is a work measurement technique for re cording the times and rates of working for
the elements of a specified job carried out under specified conditions and for analyzing the data
so as to obtain the time necessary for carrying out the job at a defined level of performance.
Objectives of Time Study
-
To furnish a basis of comparison for determining operating effectiveness
To set labor standard for satisfactory performance.
To determine standard costs.
To compare alternative methods in method study
To determine basic/normal times.
To determine the no. of machines.
To balance the work of operators. .
To provide a basis for setting piece rate/incentive wages.
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MODULE 5
Capacity planning
Capacity Planning:
Capacity refers to the maximum load an operating unit can handle. The operating unit might be a
plant, a department, a machine, a store or a worker.
Production capacity:
The production capacity of a facility or a firm is the maximum rate of production the facility or
the firm is capable of producing. It is usually expressed as volume of output Per period of time.
Types of capacity
(i) Fixed capacity: This refers to the capital assets (buildings and equipments) a firm possesses at
a particular time. It cannot be easily changed in a short period of time.
(ii) Variable capacity: This refers to the size of the work force. The no. of hrs per day or per
week the equipment and labour work and the extent of overtime and subcontracting of work.
(iii) Immediate capacity: is that which can be made available within the current budgeted period.
(iv) Potential capacity: is that which can be available within the decision Horizon of the
management.
(v) Design capacity: It is the planned rate of output of goods or services under normal working
conditions. It sets the upper limit to capacity assuming that there is no capacity loss due to
absenteeism, poor planning & Non-availability of materials etc.
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(vi) Operating capacity: It is the capacity which can be utilized after taking into account the
capacity losses due to ineffectiveness, bad planning, rejections and sc rap rate etc.
(vii) System capacity: is the maximum output of a specific product or product mix, a production
system can produce. It is less than design or installed capacity because of limitation on the
system due to
(i) Changes in product mix (ii) Quality specifications (iii) Balance of equipment and labour.
(viii) Normal or Rated capacity: It is the estimated quantity of output or production that should
be normally achieved taking into consideration the overall efficiency of equipment and labour.
The actual capacity which is available for utilization is less than the rated capacity and is
expressed as a percentage of rated capacity.
ix) Utilized capacity: This is the actual output achieved during a particular time period.
Utilization = Actual output

Design capacity
Actual output
System efficiency= System capacity
X) Peak capacity: It is the maximum output that a process or facility can achieve under ideal
conditions, peak capacity can be reached by using excessive overtime, extra shifts, over staffing
and subcontracting.
Xi) Surplus capacity: It is the excess or unutilized capacit6y which is available as surplus to be
utilized for any new customers order or any increased in forecasted demand for a
Future time period.
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xii) Bottle neck capacity: Most facilities have multiple operations and often their effective
capacities are not identical. A bottle neck is an operation which has the lowest effective capacity
of any operation in the facility and thus limits the systems capacity and output.
Factors affecting determination of plant capacity:
i) Market demand for the product
ii) Capital Investment required
iii) Level of automation desired.
iv) Type of Technology selected
v) Changes in product design, process design, market conditions and product life cycle.
vi) Product obsolescence and Technology obsolescence.
vii) Flexibility for capacity additions.
Capacity planning decisions:
Capacity planning involves activities such as
a) Assessing the capacity of existing facilities
b) Forecasting the long range future capacity needs.
c) Identifying and Analyzing sources of capacity for future needs
d) Evaluating the alternative sources of capacity based on financial, Technological and
Economic considerations.
e) Selecting a capacity alternative most suited to achieve strategic mission of the firm.
Types of capacity planning
A) On the basis of time horizon,
a) Long range (term) capacity planning
b) Short range (term) capacity planning
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B) Based on the amount of resources employed,

a) Finite capacity planning
b) Infinite capacity planning
(i) Long term capacity planning: long term capacity planning is done to include major changes
that affect the overall level of output in the long run .the major change could be decisions to
develop new product lines, expanding existing facilities and construct new or phase out existing
production plants.
(ii) Short term capacity planning: is concerned with meeting the relatively intermediate variation
in demand due to seasonal or economic factors. Short term capacity planning involves adjusting
the capacity to match the varying demand in short run by
a) Use of overtime or idle time
b) Increasing the No. of shifts
c) Subcontracting to other firms.
Finite capacity planning: when the customer doesnt specify the delivery schedule or where the
products are produced to stock and sell. It is simpler to use forward scheduling based on finite
capacity. (The surplus capacity available to accommodate the new customer order) to arrive at
the delivery or completion schedule.
Infinite capacity planning: If the delivery schedule is fixed by the customer, then the backward
scheduling is done to accommodate this delivery schedule by planning for infinite capacity
(capacity required to execute the customer order in the shortest period possible)
Factors affecting capacity planning:
a) Controllable factors
b) Less controllable factors.
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Controllable factors include amount of labour employed, facilities installed. Machines, tooling
shifts of work per day, days worked per week, overtime work, subcontracting, preventive
maintenance, and no. of production set ups.
Less controllable factors include absenteeism. Labour performance, machine break-downs,

material shortages, scrap and reworks, strike, lock-out fire accidents etc.
Developing capacity alternatives: To enhance capacity Management, the following approaches

to capacity alternatives could be developed.
i) Designing flexibility into the system:
Designing flexible production systems can offer potential benefits in long range capacity
planning because of the risks inherent in long term forecasts.
Ex: It would be less expensive to provide for future expansion in the originated design of a
structure rather than remodeling an existing structure to accommodate higher production
capacity.
ii) Differentiating between new and mature product and services: Capacity requirements of
mature products can be predicted more precisely and mature products may have limited life
spans. The possible limited life span of matured products or service may necessiate finding an
alternative use for the resulting excess capacity at the end of life span. On the other hand, new
products tend to carry higher risk because the quantity demanded and duration of the demand
cannot be predicted accurately.
iii) Taking a big- pitcher approach to capacity changes: - When developing capacity alternatives
a firm must consider how different parts of the system interrelate. Ex., when the management of
a five star Hotel makes a decision to Increase the No of rooms, it must also consider probable
increased demand for parking lots restaurant seating capacity, bigger dining hall and kitchen
capacity.
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iv) Preparing to deal with Chunks of capacity: - Usually, capacity increases are often acquired
in the form of fairly large chunks of capacity rather than small increments is capacity.
Ex.: in a steel pant, the existing capacity of a furnace may not be enough to meet the
Demand, but installing an additional furnace would result in having less capacity because
additional furnaces cannot be installed in small capacity chunks.
v) Attempting to smooth out capacity requirements: - Having unevenness in capacity
requirement may be problematic. For eg. During seasons of bad or extreme weathers, more and
more people may tend to use public transport vehicles for their travel rather than using their own
vehicles. Consequently the public transportation system may tend to alternate between under
utilization and over utilization.
vi) Identifying the optimal operating level:-
The optimal operating level is the Ideal level of operation at which the cost per unit is the
lowest for the production unit. Larger or smaller volumes of output would result in higher unit
cost.
Aggregate production planning:-
It is the process of determining output levels (units) of product groups over the next 6 to
18 months period on a weekly or monthly basis. The plan indicates the overall level of outputs
supporting the business plan. The aggregate plan is a statement of a firms production rates,
work-force levels and Inventory holding based on estimates of customer requirements and
capacity Limitations.
Objectives of Aggregate planning:1. The overall objective is to balance conflicting objectives involving customer service, work
force stability, cost and profit.
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2. To establish company-wide strategic plan for allocating resources.

3. To develop an economic strategy to meet customer demand.
Importance of Aggregate planning:1. Engineering: - New products, product design changes and machine standards.
2. Materials: - Supplier capabilities, storage capacity and materials availability.
3. Operations: - Current Machine capacities, plans for future capacities, workforce
capacities and current staff levels.
4. Marketing & Distributions: - Customer needs demand forecasts, competition behavior.
5. Accounting & Finance: - Cost data and financial condition of the firm.
6. Human Resources: - labour market conditions and training capacity.
Aggregate Capacity Planning:-
It is the process of devising a plan for providing a production capacity scheme to support
the intermediate range sales forecast.
As forecasted demand becomes known in the form of customer orders, aggregate
capacity plans may have be to revised upward and downward to avoid either over loaded or
under loaded facilities.
Need for aggregate capacity planning:-
1. It facilitates fully loaded facilities and minimizes overloading and under loading and
keeps the production costs low.
2. Adequate production capacity is provided to meet expected aggregate demand.
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3. Orderly and systematic transition of production capacity to meet the peaks and valleys of
expected customer demand is facilitated.
4. In times of scarce production resources, get the maximum output for the amount of
resources enhanced.
5. To manage change in production / operations management by planning for production
resources that adapt to the changes is customer demand.
Steps in Aggregate Capacity planning:-
Prepare the sales forecast for each product that indicates the quantities to be sold in each
time period over the planning horizon.
Sum up the individual product or service forecast into one aggregate demand for the
factory.
Transform the aggregate demand for each time period into labour, materials, machines
and other elements of production capacity required to satisfy aggregate demand.
Develop alternative resource schemes for supplying the necessary production capacity to
support the cumulative aggregate demand.
Select the capacity plan from among the alternatives considered that satisfies aggregate
demand and best meets the objectives of the organization.
Approaches to Aggregate planning:-
1. Top Down approach: - Involves development of the entire plan by working only at the
highest level of consolidation of products. It consolidates the products into an average product
and then develops one overall plan. This plan is disintegrated to allocate capacity to product
families and individual products.
2. Bottom-up Approach: - Involves development of plans for major products or product

families at some lower level within product line. These sub plans are then consolidated to arrive
at the aggregate plan which gives the overall output and the capacity required to produce it.
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3. Capacity Requirement Planning:Capacity requirement planning is a technique for determining what labour / personnel and
equipment capacities are needed to meet the production objectives symbolized in the Master
Production schedule (MPS) and the Material requirement planning (MRP-I)
Aggregate capacity planning strategies:-
Aggregate capacity planning involves the best quantity to produce during time periods in
the Intermediate-range Horizon and planning the lowest cost Method of providing the
adjustable capacity to accommodate production requirements.
Two types of aggregate plans that are commonly used area. Level capacity plan.
b. Matching capacity with aggregate Demand plan.
a) Level capacity plan: Level capacity plans have uniform capacities per day from time period to
time period. The underlying principle of Level Capacity Plan is produce to stock
and sell
firms is operate production systems at uniform production levels and let finished
goods inventories rise and fall as they will to buffer the differences between aggregate demand
and
production levels from time period to time period.
Advantages: cost of hiring and laying off workers and using overtime is practically eliminated.
The cost of locating and developing new sources of material supplies is minimized.
ii) Labour and material cost/unit of output is low.
iii) Simplified supervision and low scrap rates since workers are experienced in their jobs.
iv) Low operating cost
v) Dependable production rates.
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Disadvantages:
a) Results in higher finished goods.
b) Higher Inventory levels
c) Increased Inventory carrying costs.
B) Matching capacity with Aggregate demand plan: In this plan, the production capacity is
matched with the aggregate demand in each time period. The work force is fluctuated to support
the aggregate plan. Material flows and machinery capacity would be allowed to change from
quarter to quarter to match the aggregate demand.
The main advantage of this plan is the lower levels of finished goods. Inventory resulting in
lesser carrying costs when compared to level capacity plan. However labour and materials cost
tend to be higher because of frequent changes in work force, material supplies and increasing or
decreasing machine capacities.
Strategies for aggregate capacity planning:
1) Active strategies: The objective is to smooth out the peaks and valleys of demand during the
planning horizon to obtain a smoother load on production facilities. During periods of low
demand, increased sales can be encouraged through price cuts. During periods of high demand,
management can choose not to meet all the demand requirement but this approach ignores
opportunities of increased revenue.
2) Passive strategies: The objective is not to change demand but to absorb somehow the
fluctuations in demand. The alternatives include varying any one of the work force size,
production rate, and inventory, sub contracting and capacity utilization.
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Resource Requirement planning: Resource requirement planning is directed at determination of

the amount and timing of production resources such as personnel, materials, cash and
production capacity needed to produce the finished products or end Items as per the master
production schedule.
It is an aggregate planning tool that is used to sum up and evaluates the work load that a
production plan (MPS) imposes either on all work centers or on only selected key work centre
where resources are limited, expensive or difficult to obtain from outside sources.
Rough cut capacity planning is usually applied to the critical work centers which are most likely
to be bottlenecks.
Resource Requirement Planning System (Diagram)

Functional Inputs
Resource
requirement Outputs
planning
Marketing
short
range
Marketing
end
demand forecast
production schedule
Finance cash availability
Finance/accounting
inventory norms.
Inventory level schedule
item
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capacity
Production -MPS, load profile
constraints, development of
Master production schedule
MPS, CRP and MRP.
(MPS)
Engineering
changein
capacity utilization data,

Planned materials order, shop
product design and product
floor plans.
structure.
Personal
employee
Engineering
availability
Purchasing
new
design
incorporation data.
material Material
supply availability
requirement
planning(MRP)
Personnel
MIS. Data base system
employee
requirement schedule
Bill of material file.

Purchasing planned order and
order releases
Capacity
planning(CRP)
requirement
MIS. data base system updated
inventory status file.
Material Requirement planning: Material requirement planning is computer based system in
which the given MPS is exploded into the required amounts of raw materials, parts and sub
assemblies, needed to produce the end items in each time period of the planning horizon. The
gross requirement of these materials is reduced to net requirements by taking into account that
material that are in inventory or on order.
Objectives of MRP
1) to improve customer service by meeting delivery schedules promised and shortening

delivery schedules promised and shortening delivery lead times.
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2) To reduce inventory costs by reducing inventory levels,

3) To improve plant operating efficiency by better use of productive resources.
Benefits of MRP:
a) Inventory: the info provided by the MRP system is useful to better co ordinate orders for
components with production plans for parent items. This results in reduced levels of average
inventory for dependent demand items.
b) Production: Info from MRP facilitates between utilization of human and capital resources.
c) Sales: MRP helps to check in advance whether the desired delivery dates are achievable. It
improves the companys ability to react to changes in customer orders.
d) Engineering: MRP helps in planning the time of design releases and design changes.
e) Planning: MRP can simulate changes in the MPS for purpose of evaluation of alternative
MPS. It facilitates projection of equipment and facility requirement.
f) Purchasing: MRP helps purchase dept. by making known the real priorities and recommending
changes in due dates for orders so that the purchase staff may expedite or delay the orders placed
on vendors.
g) Scheduling: better scheduling can result from MRP through better knowledge of priorities.
h) Finance: MRP can help better planning of cash flow requirements. It can identify time
capacity constraints or bottleneck work centers thereby helping operations managers to make
better capital investment decisions.
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Elements of MRP
Master production schedule (MPS)
The MPS specifies what end products are to be produced and when the planning Horizon should
be long enough to cover the cumulative lead times of all components that must be purchased or
manufactured to meet the end product requirements.
b) Bill of Materials (BOM) file:
This file provides there info regarding all the materials parts and sub assemblies that go into the
end product. The bill of materials can be viewed as having a series of levels, each of which h
represents a stage in the manufacture of the end product. The highest level of BOM represents
the final assembly or end product. The BOM file identifies each component by a unique part
number and facilitates processing by exploding the end product requirements into component
requirements.
c) Inventory status file: The inventory status file gives complete and up to date info on hand
quantities. Gross requirements scheduled receipts and planned order releases for the item. It also
includes other into such as lot sizes, lead times, safety stock levels and sc rap allowances. The
gross requirements are total needs from all resources whereas the net requirements are net after
allowing for available inventory and scheduled receipt.
Scheduled receipts are the quantities already on order from a vendor or in house shop. Planned
receipts are quantities that will be ordered on a vendor or in house shop. Planned order release
indicates the quantity and date to initiate the purchase or manufacture of materials that will be
received on schedule after the lead time offset.
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MODULE VI
MATERIALS MANAGEMENT
Materials are any commodities used directly or indirectly in producing a product or service as
raw materials, component parts, assembles and supplies. In the manufacturing organizations. The
important inputs are referred to as 5 Ms, Men, Machines, Money, and Materials & Methods.
According to Bailey and Farmer, a material Management is the Management of
the flow of Materials into an organization to the point, where those materials are converted
into firms end
products.
According to Lee and Dobler, Materials Management is the process by which an
organization is
supplied with goods and services that it needs when the Material is either consumed or
incorporated into some product. The executives who engage in Materials management, are
concerned with there basic activities, viz., buying, storage of Materials and
movement.
Importance of Materials management: The amount of Money spent on materials is higher than other inputs put together.
(Machinery, labour,energy etc.,)
Materials offer considerable scope for reducing costs and improving profits.
Since material is treated as a major part of current assets, improving return on investment
depends on effective utilization of materials.
Materials add value to the product.
Quality of finished product depends on the quality of materials used to produce them.
Materials management encompasses areas such as purchasing, storing, Inventory control,
Transportation and shipping.
Materials are life blood of development of Humanity.
Objectives of Materials Management:1. Lower prices for materials and equipments purchased.
2. Higher inventory turnover ratio.
3. Continuity of supply of materials.
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4. Reduced procurement lead time.

5. Reduced Transportation cost.
6. Less duplication of efforts.
7. Reduced obsolescence of Materials.
8. Improved vendor relationship.
9. Better inter-departmental co-operation.
10. Improvement of overall productivity of firm.
Functions of materials Management:1. Materials planning and budgeting.
2. Procurement of Materials.
3. Storage of Materials.
4. Issue of Materials.
5. Inventory control
6. Vendor development.
7. Vendor evaluation and vendor rating.
8. Material accounting.
9. Materials handling and transportation.
10. Disposal of scrap.
11. Traffic management.
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Purchasing:It refers to the function of procuring of materials, supplies, Machines, equipments, tools, spare
parts and services required for meeting the needs of production department and maintenance
department.
Functions of purchasing:1. Materials requirement review.
2. Specifications development for materials.
3. Make-or-buy analysis.
4. Materials standardization.
5. Determination of Inventory levels.
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6. Determination of quality requirements.

7. Negotiation of price & terms of supply.
8. Supplier selection.
9. Joint problem solving with suppliers
10. Productivity / cost improvement.
11. Vendor analysis / rating.
12. Market analysis.
13. Price forecasting.
14. Value analysis.
15. Determination of purchasing policy.
Purchasing policies:It defines the basic decisions of Top management as they relate to buying actions. In most
companies, the following areas covered by policy statements.
A definition of Authority and responsibility for purchasing.
Relationship with vendors / suppliers.
Treatment of sales representatives of vendor.
Proper handling of competitive bidding.
Reciprocity.
Employee purchases.
Ethical practices in purchases.
Purchasing Manuals: - Purchasing manuals are designed to avoid conflicts between
departments, to classify responsibility, and to provide consistent instructions covering the regular
activities of the purchasing department. There are two types of purchasing manuals.
a.
Policy manual.
b. Procedures manual.
a. Policy manual: - is a written statement of companys general purchasing policies for use
by all concerned. Both inside and outside the company. copies of the purchasing policy
manuals may be made available to the vendors.
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b. Procedure Manuals: - is a detailed precise statement of the intra-company procedural

responsibilities. This helps to ensure that all repetitive actions carried out in the
purchasing department will be performed in a consistently efficient manner.
Ethics in purchasing:a. Should not compromise on companys interest.
b. Should not exploit the buyer/ supplier.
c. Should not entertain gifts or prizes
d. Should not bribe middlemen / intermediaries
e. Should not exert undue pressure on supplier
f. Should not give misleading information
g. Should not inflate prices / offers.
Purchasing Methods:a. Purchasing by requirements:-
This means that no purchase is made until a need arises and then the quantity
bought covers only the current need. This method applies to emergency requirements or
to infrequently used goods which could not be stocked.
b. Purchasing for a specified future period:
This is a standard practice for goods regularly used, but not in large quantities and
for which price variations are negligible. Most suppliers are bought by this method.
C. Purchasing According to Market:-
This method is designed to take advantage of price fluctuation. The quantities purchased
conform to the production schedule and its possible changes or to the demands of the plant or
business. In cases where the firms have definite manufacturing or consumption programs. The
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purchase department studies the Market statistics and factors that affect prices and forecast the
trend of market prices and buy to best advantages.
D. Speculative purchasing:
This refers to buying when market is low (low price), more than can possibly be used in
manufacturing, with the idea of reselling much of the material at a higher price to users who may
come to the market when the price is high.
e. Forward Buying:It is nothing but committing an organization into the future (usually one year). The buyer
commits to buy a future date a contracted quantity at contracted price, whatever may be the
ruling market price in the contracted period. The future commitment is decided depending upon
the availability of the item, financial policies, EOQ, Qty Discounts and staggered delivery.
f. Hedging:It is different from forward buying. In this the buyer tries to protect himself in the future
by entering into two transactions. A purchase contract and a sales contract in two different
markets, whose prices move up and down together. The profit or loss sustained in the buying
transaction is compensated by the loss / profit in selling transaction.
g. Contract purchasing:-
Contract purchasing offers advantages comparable to those of speculative purchasing. By

a contract calling for deferred delivery over a period, advantages can be had of low prices in
effect on materials at the time of placing the contract, while spreading delivery of materials over
a schedule consistent with estimated future requirements.
h. Group purchasing:A no. of small items can be purchased as group which offers the possibility of large savings.
When the items are small and of trivial value, the cost of placing an order often exceeds the
value of items purchased. Hence such items are better bought under the method of group
purchasing.
i. Blanket order:These are purchase orders placed and accepted for large quantities of Materials to be
delivered as later specified. By the agreement, the vendor agrees to supply and the buyer the
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vendor agrees to supply and the buyer agrees to accept a stated no. of units, normally within a
given period.
j. Tender Buying:This method (also known as tender system) is adopted to procure materials at the most
competitive rates and to eliminate chances of undue favor to any supplier. The prime objective is
to avoid negotiation and give equal opportunity for all vendors. It is usually adopted by Govt.
Departments and public sector undertaking to choose the best supplier without any bias.
There are three kinds of tenders used are:a.
Open Tender.
b. Limited Tender.
c. Single Tender
a. Open Tender: - Tenders are invited by advertising in at least three or four English
Newspaper and in Indian Trade Journal. The suppliers will usually have to quote in the
Tender forms along with earnest Money deposit. Once the quotations are received, the
tenders are opened publicity and a comparative statement is made and the tender is
awarded to the lowest tender meeting the technical specifications.
b. Limited Tender: - To avoid the quotation of an irresponsible bidder (Who quotes a very
low price in order to get the order, but will not be able to execute the orders) Limited
Tender system is used. In this, quotations are solicited by sending tender forms to get
quotations from a few selected suppliers who are competent to executive the order.
c. Single Tender: - For proprietary items or single source items, single tender system is
adopted.
Vendor Development & Selection: - Usually a combination of price, quantity, quality, delivery
time and service is used to rate the vendors, giving relevant weight ages to each of these factors.
a.
Reliability:-
Is supplier reputed, stable and financially strong?
Are the suppliers Integrity and ability beyond doubt
Is the supplier going along with product development?
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Is the suppliers competitive strength as to price, quality etc proved by past

experience?
b. Technical Capabilities:-
Can supplier provide assistance as to application engineering?
Can the supplier provide assistance as to analytical engineering?
Can the supplier provide design assistance?
Can the supplier handle special needs?
C. Convenience:- Can the supplier help reducing acquisition cost?

- Can he / she offer other related products?
- is he / she qualified to help in solving difficult problems?
- Does the supplier pack his product conveniently?
d. Availability:- Does the supplier help reducing acquisition cost?
- Does the supplier assure delivery in time?
- Are his / her stocks locally available and / or at short notice?
- can he / she plan his supply to Minimize inventory?
- Can he / she be depended on for a steady supply of
materials? e. After Sales service:- does the supplier have a service organization?
- is an emergency service available?
- Are parts available when needed?
Sales assistance:-Can the supplier help building mutual markets?
- will he / she recommend our products?
- Does the use of suppliers product enhance the appearance of our products?
Stores management:Receiving and storing are important flow control activities in the Materials Management
chain. In industries, Materials have to be stocked to meet the consumption requirements during
lead time or extension of lead time due to delay by suppliers or due to unexpected increase in the
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consumption rate. Ware housing is not the simple act of storing materials, but rather a package of
services which enables the smooth flow of materials through the production departments without
causing stoppage of production due to shortage of materials.
Types of Stores:a.
Raw Material Store.
b. Component store.
c. Consumable Materials Stores.
d. Semi-finished goods stores.
e. Finished goods stores.
f. Inward goods stores / transit stores.
g. Holding stores.
h. Spare parts stores.
i. Inflammable materials stores.
j. Tools stores.
k. Stationery stores.
l. Maintenance Materials stores.
m. Rejected materials stores.
n. Scarp / disposal stores.
o. Stationary items stores.
p. Packing materials stores.

Functions of Stores Keeping:1. To receive raw materials, components, tools, equipments and other items and account for
them.
2. To provide adequate and proper storage and preservation of various kinds of materials.
3. To meet the demands of user departments by proper issues and keeping accounts of items
used by user department.
4. To minimize obsolescence, surplus and scrap through proper codification, preservation
and handling.
5. To highlight accumulation of stocks, discrepancies and abnormal consumption and
implement proper control measures.
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6. To ensure good house-keeping to facilitate proper material handling, material

preservation receipt, stocking and issue of materials.
7. To assist material accounts department in stock verification and provide supporting
information for effective purchasing.
8. To co-ordinate store keeping with related production functions.
Roles & Responsibilities of Stores management:-
1. Facilitate a balanced and smooth flow of raw materials, components, tools and any other
items necessary to meet production requirements.
2. To maintain optimum stock of materials to compensate for irregular supplies by
suppliers.
3. To achieve efficient utilization of storage space.
4. To reduce usage of materials handling equipments.
5. To provide codification of stored items for easy recognition.
6. To enable flexibility in production schedules.
7. To facilitate quantity purchases at discount prices.
8. To keep the account of all goods kept in stores.
9. To prevent theft, damage, wastage and deterioration of stored materials.
10. To maintain record of all incoming materials and issue of materials to user department.
Inventory management:The term Inventory refers to any resource that has a certain value, which can be used at a
future occasion when the demand arises. Alternatively inventory may be defined as
Stock of
items kept on hand by an organization to be used to meet customer demand.

Types of Inventory:I.
Based on Nature of Materials:1.
Production Inventories: - Raw materials, parts and component which become

part of the firms finished product in the production process.
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2. MRO Inventories: Maintenance, repair and operating supplies which are consumed
in the production process, but which does not become part of finished product.
E.g., Lubricants, grease, cotton waste, spare parts.
3. In-process Inventories: - Also known as work-in-progress or semi-finished goods.

Inventories-these are parts or sub-assemblies found at various stages in the production
process.
4.
Finished Goods Inventories: - Completed products kept in stores ready for
shipment.
II Classified by how it is created:
1. Cycle Inventory: The position of total Inventory which varies directly with Lot size
(quantity ordered) e.g., If Q is the order quantity or the Lot size and the exactly lot,
and the supply is received exactly when the stock is NIL, maximum inventory is Q
and the average cycle inventory is half of quantity ordered.
2. Safety Stock Inventory: - Safety Inventories are held to avoid stock out conditions
which cause production stoppages and to protect against uncertainties in demand, lead
time, supply and consumption rates.
3. Anticipation Inventory: - Inventory of materials purchased in Bulk quantities in

anticipation of price rise and products having seasonal demands produced in
quantities more than the demand during off-seasons and held in inventory to meet
higher demand rate during seasons of High demand.
4. Pipe-Line Inventory: - Inventory moving from point to point in the materials flow
system. Materials move from supplier to a plant, from one operation to the next in the
plant and from the plant to the customer. Pipeline inventories also include materials
that have been ordered but not received.
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5. Fluctuation inventory: - Inventory held as reserve stock to meet the unexpected

fluctuating demand over a period which cannot be predicted accurately.
Functions of Inventory:1.
To meet anticipated Demand,
2. To smooth production requirements.

3. To decouple components of the production, distribution system.
4. To protect against stock outs.
5. To take advantage of order cycles.
6. To take advantage of quantity discounts.
7. To hedge against price increases.
Inventory costs:There are two types of costs associated with Inventory namelya.
Costs associated with the purchase of Inventory items (cost of materials purchased)
b. Costs on materials consisting of three basic costs

- Ordering cost.
- Carrying cost.
- Shortage Cost.
EOQ: - (Economic Order Quantity)
D= Annual demand
Co= Ordering cost.
P=
Unit price.
C1= Carrying cost in percentage.
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Selective Inventory control

1. A-B-C-analysis:This is also referred to as Always better control or Pareto analysis. A-B-C analysis
is a basic inventory control Technique which is often the starting point. It can be applied to almost all
aspects of Materials management such as purchasing, receiving, inspection, store keeping and issue
of materials from stores, verification of bills. Inventory control, value analysis etc,
2. XYZ analysis:This classification is based on the value of inventory of materials actually held in stores
at a given time (usually during stock checking annually or half- yearly. XYZ analysis helps to
control average inventory value by focusing efforts to reduce the inventory of X items which are
usually 10% of the no. of items stored, but counting for 70% of the total inventory value.
Similarly Y items are 20% of the no. of items stored and account for 20% of the inventory value
the remaining 70% of the items accounting for 10% of the total inventory value are Z
items
3. VED Analysis:V-vital, E-Essential and D-Desirable. This classification is usually applied for spare parts
to be stocked for maintenance of machines and equipments based on the criticality of spare parts.
The stocking policy is based on the criticality of the items. The vital spare parts are those which
can cause stoppage of the plant if not available. Usually such spare parts are known as capital or
insurance spares. The inventory policy is to keep at least one number of the vital spare
irrespective of its value.
4. FSN Analysis:It stands for fast moving, slow-moving and non-moving items. The classification is based
on past consumption pattern. Items which are usually drawn from stores frequently are classified
as Fast moving items; items which are drawn once or twice a year are classified as slow- moving
items and items not drawn at all for past two years are classified as non-moving
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items FSN analysis is useful to control obsolescence of raw materials, components, tools and
spare parts.
5. HML Analysis:This stands for high value, medium value and low value items based on unit price of the
item.
6. SDE analysis:-
This stands for scarce, items, difficult to procure items and easy to procure items. A scare
item is one which is not easily available in the market and reliable source may have to develop.
Eg, imported items may have to be stocked because it is difficult to procure and takes long lead
time.
7. SOS analysis:-
S- Stands for seasonal items and OS stands for off-seasonal items. It may be
advantageous to buy seasonal items at low prices and keep inventory or buy at high price during
off seasons.
8. G O L F Analysis:
This stands for Government, open market, local / foreign source of supply. For many
items, imports can canalized through Government agencies such as state Trading
Corporations, mineral and metals Trading Corporation. Indian Drugs and pharmaceutical etc.
For such items the buying firms cannot apply any inventory control techniques and have
to accept the quota allotted by the government. Open market is those who form bulk of suppliers
and procurement is rather easy. L category includes those local suppliers from whom items can
be purchased. Off-the-shelf on cash purchase basis. F category indicates foreign suppliers. Since
an elaborate import procedure is involved. It is better to buy imported items in bigger lots usually
to buy imported items in bigger lots usually covering the annual requirements.
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MODULE-7
Quality management -1
Quality- The ability of a product or service to meet customer needs.
The quality of a product or service is a consumers perception of the degree to which the
product or service meets his / her expectation.
Quality can be described as doing the right thing, doing it the right way, doing it on time
doing it right the first time and doing it right every time.
Dimensions of quality:1. Performance: - How well the product or service performs the customers intended
use. Eg, Speed of a laser printer.
2. Features: - The special characteristics that appeal to customers.
Eg, Power steering and central locking system of an automobile.
3. Reliability: - The likelihood of breakdown, malfunction or need for repairs.

4. Service ability: - The speed, cost and convenience of repairs and maintenance.
5. Durability: - The length of time or amount ability use before needing to be repaired or
replaced.
6. Appearances: - The effect on human senses like, look, feel, taste, smell and sound.
7. Customer service: - The treatment received by customers before, during and after the
sale.
8. Safety: - How well the product protects users before, during and after use.
Five Views of Quality:1. Transcendental View:Neither mind nor matter, but a third entity independent of the two. Even though quality
cannot be defined but it can be experienced.
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A condition of excellence implying fine quality as distinct from poor quality. Quality is
achieving or reaching the highest standard as against being satisfied with sloopy or fraudulent.
2. Product-based View: - Differences in quality amounts to differences in the Quality of some
desired ingredient or attribute. Amounts of non-price attribute contained in each unit of the
priced attribute.
3. User-based View: - Capacity to satisfy wants. In the final analysis of the market place, the
quality of a product depends on how well it fits patterns of consumer preference. Quality is
fitness for use.
4. Manufacturing-based View- Conformance to requirements.
The degree to which a specific product conforms to a design or specification.
5. Value-based view: - The degree of excellence at an acceptable price and the control of
variability at an acceptable cost.
Types of Quality:1. Indifferent quality: - is the quality that the customer does not notice or appreciate. The
indifferent quality evokes a response like-That is fine, but who cares?
Eg. A garnish on a dinner plate or a finger bowl. It is not very important.
2. Expected Quality: - is the quality that the customers expects and demands.
Eg. People expect cars to be safe and reliable. Hotel rooms to be clean and quite.
People expect expected quality only when it is missing.
3. One-dimensional quality: - is the quality that the customer expects, but that does not
necessaries result in lots of order or displeased customer when lacking.
Ex., a restaurant server who is rude and slow may not cause customers to leave. Though they
might leave a low tips. However, customer would leave if they found an insect in the food served
to them. The restaurant service is a one dimensional quality.
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Existing quality: - is the quality that exceeds the customers expectations, attracting
favorable attention of customers. It is the quality that pleasantly surprises customers.

Eg, quality experienced by owners of Mercedes Benz and BMW cars. While driving these cars.
It has to a greater extent surpassed their expect ations.
Costs of Quality:a. Prevention costs: - Prevention costs are associated with preventing defects before they
happen. They include the costs of redesigning the production to make it simpler to product
redesigning the process to remove causes of poor quality. Training employees is the methods of
continuous improvement.
b. Approval Costs: - are incurred in assessing the level of quality attained by the operating
system. They include the cost of detecting defects. The cost of all activities aimed at finding
products and services that do not conform to specifications before they are shipped to customers.
c. Internal failure cost: - result from defects that are discovered during the production of a
product or service. When products are found to be defect while in production. They must either
be scrapped or repaired. The costs; include the cost of products the items that are scrapped. The
cost of repairing reworking and retesting defective products.
d. External failure cost: - arise when a defect is discovered after the customer has received the
product or service. These costs include warranty costs, product liability or settlements, the cost of
product returns or recalls.
Juran Trilogy:Dr. Jurans trilogy defined the three management processes required by every
organization to improve. Quality control, quality improvement and quality planning.
This Trilogy shows how an organization can improve every aspect by better
understanding of the relationship between processes that plan control and improve quality as
well as business results. It was created in the 1950s and defines managing for quality as three
basic quality-oriented, interrelated processes.
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Quality planning:To determine customer needs and develop processes and products needed to meet exceed
those of the customer needs. The processes are called Design for Six Sigma or Concurrent
Engineering. This can be particularly challenging for a planning team, because customers are not
always consistent with what they say they want. The challenge for quality planning is to identify
the most important needs from all the needs expressed by the customer.
Identify who are the customers.

Determine the needs of those customers.
Translate those needs into our language.
Develop a product that can respond to those needs.
Optimize the product features so as to meet our needs and customer needs.
Quality Control:The purposes of quality control is to ensure that process is running in optimal effectiveness,
or to ensure that any level of chronic waste inherent in the process does not get worst. Chronic
waste which is a cost of poor quality; that can exist in any process, may exist due to various
factors including deficiencies in the original planning. It could cost a lot of money to the
company, from rework time to scrap product to overdue receivables. If the waste does get worst
(sporadic spike), a corrective action team is brought in to determine the cause or causes of this
abnormal variation. Once the cause or causes had been determined and corrected, the process
again fails into the zone defined by the quality control units.
Prove that the process can produce the product under operating conditions with minimal
function.
Transfer the process to operations.
Quality Improvement:Eliminate waste, defects and rework that improves processes and reduces the cost of
poor quality. The processes have to be constantly challenged and continuously improved. Such
an improvement does not happen of its own accord it results from purposeful Quality
Improvement or Breakthrough.
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Develop a process which is able to produce the product.

Optimize the prices.
Dr. W. Edward Demings 14 Principles:
1. Constancy of purpose:Create constancy if purpose for continual improvement of products and service to society,
allocating resources to provide for long range needs rather than only short term profitability, with
a plan to become competitive, to stay in business and to provide jobs.
2. The new philosophy:Adopt the new philosophy. We are in a new economic age, created in Japan. We can no
longer live with commonly accepted level of delays, mistakes, defective materials and defective
workmanship. Transformation of Western management style is necessary to halt the continued
decline of business and industry.

3. Cease dependence on mass inspection:Eliminate the need for mass inspection as the way of life to achieve quality by building
into the product in the first place. Require statistical evidence of built in quality in both
manufacturing and purchasing functions.
4. End lowest tender contracts:-
End the practice of awarding business solely on the basis of price tag. Instead require
meaningful measures of quality along with price. Reduce the number of suppliers for the same
item by eliminating those that do not qualify with statistical and other evidence of quality. The
aim is to minimize total cost, not merely initial cost, by minimizing variation. This may be
achieved by moving towards a single supplier for any one item, on a long term relationship of
loyalty and trust. Purchasing managers have a new job, and must learn it.
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5. Improve every process:Improve constantly and forever every process for planning, production, and service.
Search continually for problems in order to improve every activity in the company, to improve
quality and productivity, and thus to constantly decrease costs. Institute innovation and constant
improvement of product, service and process. It is managements job to work continually on the
system (design, incoming materials, maintenance, improvement of machines, supervision,
training, retraining)
6. Institute training on the job: Institute modern methods of training on the job for all, including management, to make
better use of every employee. New skills are required to keep up with changes in materials,
methods, product and service design, machinery, techniques and service.
7. Institute leadership:Adopt and institute leadership aimed at helping people do a better job. The
responsibility or managers and supervisions must be changed from sheer numbers to quality.
Improvement of quality will automatically improve productivity. Management must ensure that
immediate action is taken on reports of inherited defects, maintenance requirements, poor tools,
fuzzy operational definitions, and all conditions detrimental to quality.
8. Drive out fear:Encourage effective two way communication and other means to drive out fear
throughout the organization so that everybody may work effectively and more productively for
the company.
9. Break down barriers:Break down barriers between departments; and staff areas. People in different areas, such
as Leasing, maintenance, Administration, must work in teams to tackle problems that may be
encountered with products or service.
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10. Eliminate exhortations:Eliminate the use of slogans, posters and exhortations for the work force, demanding
Zero Defects and new level of productivity, without providing methods. Such exhortations only
create; adversarial relationships; the bulk of the causes of low quality and low productivity
belong to the system, and thus lie beyond the power of the work force.
11. Eliminate arbitrary numerical targets:Eliminate work standards that prescribe quotas for the work force and numerical goals for
people in management. Substitute aids and helpful leadership in order to achieve continual
improvement of quality and productivity.
12. Permit price of workmanship:Remove the barriers that rob hourly workers, and people in management, of their right
to pride of workmanship. This implies, among other things, abolition of the annual merit rating
(appraisal of performance) and of Management by Objective. Again, the responsibility of

managers, supervisors, foremen must be changed from sheer numbers to quality.
13. Encourage education: Institute a vigorous program of education, and encourage self improvement for everyone.
What an organization needs are not just good people. It needs people that are improving with
education. Advances in competitive position will have their roots in knowledge.
14. Top management commitment and action:Clearly define top managements permanent commitment to ever improving quality and
productivity and their obligation to implement all of these principles. Indeed, it is not enough
that top management commit themselves for life to quality and productivity. They must know
what it is that they are committed to-that is, what they must do. Create a structure in top
management that will push every day on the preceding 13 points, and take action in order to
accomplish the transformation support is not enough action is required.
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7 quality control tools:1. Check Sheet

A check sheet is a pre-designed format for collection of data that encourages organized
collection and groups data into categories. Categories are created in advance and may be added
as needed. A check mark is added for each example of a category. The marks are added to
determine subtotals.
To keep track of the parameters of an ongoing process. It can be used to track events by
such factors as timeliness (on time, one day late, two days late, etc.) reason for inspection failure
(appearance, performance, etc.) person accomplishing the task (sales calls per representative),
when something happens (customer complaints for each day of the month), and many others.
2 Graphs
Graphs are used for the purpose of comparison of visual represent tation of data
collected. The most commonly used graphs are in the form of bar charts, line charts and pie
charts.
3 Histogram
A display of the distribution of data by category. It is a more effective way of displaying
data than a table of figures because it gives a visual indication of relationships.
Use a histogram to observe e whether data falls into a specific patter. The chart will indicate the
extent of variation n. For example, it might show the frequency with which various levels of
defects turn up, indicating that most lots have 15-20 defects. A succession of histograms can be
used for comparison.
Example: A company produces a chemical in which a constituent named as Alpha should
be present in the chemical more than 30 mgms. In a cubic centimeter of volume. Quality control
department is measuring the characteristics of the sample received from the reactor and displays
it in a histogram.
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4 Pareto Chart
A special form of a bar chart which seeks to determine the most important factors in a
situation. It is based on the idea that a few causes produce a vast majority of variations. A rule of
thumb says 20% of causes account for 80% of variations.
When you want t to determine which corrective e actions would yield the greatest quality
payback. A Pareto chart is a good way to set priorities and to focus your quality efforts. Examine
the data indicating the frequency with which each cause of a problem occurs. List them from
most to least frequent. Plot them on a bar graph. The left vertical scale indicates the frequency
that each bar represents. The right vertical scale indicates the percentage of total occurrences that
is covered by the sum of the causes. For each cause, add the per cent of problems that it accounts
for to the per cent accounted for by the causes to the left to it and plot points against the right
scale that represent this total connect these points with a line.
Example: Let us take an example of an airline, which is trying to analyze and priorities the
quality complaints received from its customers. The complaint data are as below.
Type of complaint Number
Baggage delay 23
Missed connections 15
Lost baggage 7
Poor cabin service 3
Ticketing error 2
From the Pareto chart prepared as per the data, we can find out the relative magnitude of
complaints and can identify the most important opportunity for improvement in quality of airline
service. As shown in the chart, 75% of customer complaints are related to baggage delay and
missed connections only.
Based on this finding, the airline staff can use cause and effect diagram to figure out the root
causes of these two major problems.
5 Cause and Effect Diagram
This diagram represents the relationship between a problem and its potential causes. Its
also known as fishbone or Ishikawa diagram. It deals only with factors, not quantities. This is a
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good tool for organizing thinking about a quality problem. It often stimulates ideas during brain
storming sessions and prepares the way for an orderly investigation of the causes of a problem.
You can use it both to investigate current problems and to anticipate factors that may contribute
to quality problems before they develop. This tool can also be used to list all the factors that
contribute to a desired outcome.
Example: A company wants to look at the causes for word processing errors. The causes
are organized according to the cause and effect diagram in the following figure. Three main
causes of the error were identified as, client, time and typist. Various reasons to cause defect at
these three classes are identified by cause and effect diagram, which are to be corrected from
source level to eliminate the work processing errors.
6 Scatter Diagram
A means for showing a relationship between two variables. The diagram creates a
coordinate for each variable, and then plots the occurrences where the values intersect.
To find out whether there is a correlation between the variables. It is often used to find the causes
of problems. For example, if you plot employee errors against the amount of continuous time on
the job and find a correlation, the n fatigue might be a factor in the errors. If the correlation n
doesnt exist, other factors need to be investigated.
Establish vertical and horizontal axes with appropriate scales. Usually, the horizontal axis is the
one over which you have control. Plot each data point. Look at the pattern. The more closely the
dots group along an axis, the stronger the correlation. The mo
re scattered they are, the weaker the correlation. If you determine a correlation, statistical an
analysis can give a more accurate indication of the relationship.
Example: A company wants to investigate whether the operators errors are related to
volume of work. The number of errors per month is tracked for operators with different level of
work volume. The values are entered on a scatter diagram, as in the figure. The relationship of
the data points indicates a strong positive correlation. The more the volume of work, higher the
errors.
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7 control chart
A means of monitoring a process according to tolerance limits. The chart allows you to
track the normal variations that in dictate a process is in control and to determine when it goes
out of control. A control chart is closely related to Statistical Process Control. Its a visual means
of representing whether a process is within statistical limits
For any process with frequent and measurable outcomes. A control chart enables you to ignore
charges i8n a process that a4re the result of random variations and to react immediately to
changes that indicate a problem. .
Example: As shown in the diag4ram, an engineering company producing hardware
components wants to control its shipping in order to have minimum inventory at its works using
control chart. Time is measured on the horizontal axis, which usually corresponds to the average
value of the quality characteristic being measured. Two other horizontal lines represent the
upper5 and lower control limits. These are chosen so that there is a high probability that sample
values will fall within these limits if the process is under control or affected only by common
causes of variation. If point fall outside the control limits or if unusual patterns, such as, shifts up
or down, trends up or down, cycles and so forth exist, then there is reason to believe that special
causes might be present.
7 new QC tools
1. Affinity diagram: organizes a large number of ideas into their natural relationship.
2. Relations diagram: shows cause and effect relationships and helps you analyze the natural
links between different aspects of a complex situation.
3. Tree diagram: breaks down broad categories into finer and finer levels of detail, helping you
move your thinking step by step from generalities to specifics.
4. Matrix diagram: shows the relationship between two, three or four groups of information and
can give information about the relationship, such as its strength, the roles played by various
individuals, or measurements.
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5. Matrix data analysis: a complex mathematical technique for analyzing matrices, often
replaced in this list by the similar prioritization matrix. One of the most rigorous, careful and
time consuming of decision-making tools, a prioritization matrix is an L-shaped matrix that uses
paid wise comparisons of a list of options to a set of criteria in order to choose the best
options(s).
6. Arrow diagram: shows the required order of tasks in a project or process, the best schedule for
the entire project, and potential scheduling and resource problems and their solutions.
7. Process decision program chart (PDPC): systematically identifies what might go wrong in a
plan under development.
PDCA CYCLE:PDCA was made popular by Dr. W. Edwards Deming, who is considered by many to be the
father of modern quality control; however it was always referred to by him as the
Shewant cycle. Later in Demings career, he modified PDCA to plan, Do,
Study, Act (PDSA) so as to better describe his recommendations.
PLAN:Establish the objectives and processes necessary to delivery results in accordance with
the expected output. By making the expected output the focus, it differs from other techniques in
that the completeness and accuracy of the specification is also part of the improvement.
DO
Implement the new processes. Often on a small scale if possible.
CHECK
Measure the new processes and compare the results against the expected results to
ascertain any differences.
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ACT
Analyze the differences to determine their cause. Each will be part of either one or more
of the P-D-C-A steps. Determine where to apply changes that will include improvement. When a
pass through these four steps done not result in the need to improve, refine the scope to which
PDCA is applied until there is a plan that involves improvement.
Six Sigma:
Six Sigma is a business Management Strategy originally developed by Motorola
Six Sigma seeks to improve the quality of process outputs by identifying and removing the
causes of defects (errors) and variability in manufacturing and business processes. It uses a of
quality management methods, including stastical methods, and creates a special infrastructure of
people within the organization (Black Belts, Green Belts, Etc) who are experts in these
methods. Each Six sigma project carried out within an organization follows a defined sequence
of steps and has qualified financial targets (cost reduction or profit increase)
Six Sigma originated as set of practices designed to improve manufacturing processes and
eliminate defects, but its application was subsequently extended to other types of business
processes as well. In six Sigma, a defect is defined as anything that could lead to customer
dissatisfaction.
Bill Smith firs formulated the particulars of the methodology at Motorola in 1986 six Sigma was
heavily inspired by six preceding decades of quality improvement methodologies such as quality
control, TQM, and Zero defects, based on the work of pioneers such as Stewart, Deming Juran,
Ishikawa, Taquchi and others.
Like its predecessors, six Sigma doctrines assert that:-
Continuous efforts to achieve stable and predictable process results (i.e. reduce process
variation) are of vital importance to business success.
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Manufacturing and business processes have characteristics that can be measured,

analyzed, improved and controlled.
Achieving sustained quality improvement requires commitment from the entire
organization, particularly from top-level management.
The term Six Sigma comes from a field of statistics known as process capability studies.
Originally, it referred to the ability of manufacturing processes to produce a very high
proportion
of output within specification. Processes that operate with Six Sigma quality over the short
term are assumed to produce long-term defect levels below 3.4 defects per million opportunities
(DPMO), Six Sigmas implicit goal is improve all processes to that level of quality or better.
Sigma
Percent
Percentage
Short-term
Long
Level
DPMO
defective
Yield
CPK
term CPK
391,462.
69%
031%
0.33
-0.17
308,538.
31%
69%5
69%
0.17
66,807.
6.7%
93.3
1.00
0.5
6,210
0.62%
99.38%
1.33
0.83
233
0.023%
99.97%
1.67
1.17
3.4
0.00034%
99.99966%
2.00
1.5
0.019
0.0000019%
99.9999981% 2.33
1.83
Quality Circles:A quality circle is a volunteer group composed of workers (or even students) usually
under the leadership of their supervisor (but they can elect a team leader), who are trained to
identify, analyze and solve work-related problems and present their solutions to management in
order to improve the performance of the organization, and motivate and enrich the work of
employees. When matured, true quality circles become self- managing, having gained the
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confidence of management. Quality circles are an alternative to the dehumanizing concept of the
division of labour, where workers or individuals are treated like robots.
They bring back the concept of craftsman ship, which when operated on a individual
basis is uneconomic, but when used in group form (as is the case with quality circles), it can be
devastatingly powerful and enables the enrichment of the lives of the workers or students and
creates harmony an d high performance in the workplace. Typical topics are improving
occupational safety and health, improving product design, and improvement in the workplace
and manufacturing processes.
They are formal groups. They meet at least once a week on company time and are trained
by competent persons (usually designated as facilitators) who may be personnel and industrial
relations specialists trained in human factors and the basic skills of problem identification,
information gathering and analysis, basic statistics, and solution generation. Quality circles are
generally free to select any topic they wish (other than those related to salary and terms and
conditions of work, as there are other channels through which these issues are usually
considered.
Quality deployment function:
Quality deployment function: (QFD) was developed to bring this personal interface to modern
manufacturing and business, in todays industrial society, where the growing distance between
producers and users is a concern , QFD links the needs of the customer (end user) with design,
development, engineering, manufacturing, and service functions.
QFD is:
1. Understanding customer Requirements
2. Quality systems thinking + Psychology + Knowledge/Epistemology
3. Maximizing Positive Quality that adds value
4. Comprehensive Quality System for customer satisfaction
5. Strategy to Stay Ahead of the Game.
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BENEFITS
Understanding true customer needs from the customers perspective
What value means to the customer, from the customers perspective
Understanding how customers or end users become interested. Chose, and are satisfied.
Analyzing how do we know the needs of the customer
Deciding what features to include
Determining what level of performance to deliver
Intelligently linking the needs of the customer with design, development, engineering,
manufacturing, and service functions.
Intelligently li8nking Design for Six Sigma (DFSS) with the front end voice of customer
analysis and the entire design system.
QUALITY AWARDS
MBNQA:
In 1987, jumpstarting a small, slowly growing U.S. quality movement, congress established
the Malcolm Baldrige National Quality Award to promote quality awareness, to recognize
quality and business achievements of US organizations, and to publicize these
organizations
successful performance strategies. Now Americas highest honor for innovation
and
performance excellence, the Baldrige Award is presented annually to U.S. organizations by

the President of the United States. Awards are given in manufacturing, service, small
business education, health care, and nonprofits in conjunction with the private sector, the
National Institute of Standards and Technology conjunction with the private sector the
National Institute of Standards the Technology (NIST) designed and manages the award and
the Baldrige National Quality Program.
Criteria for selection are:
1. Leadership
2. Strategic planning
3. Customer and market focus
4. Information and analysis
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5. Human resource focus

6. Process management
7. Business results.
DEMINGS PRIZE:
The Deming prize, established in December 1950 in honor of W.Edwards Deming, was
originally designed to reward Japanese companies for major advances in quality
improvement. Over the years it has grown, under the guidance of Japanese Union of
Scientists and Engineers (JUSE) to where it is now also available to non-Japanese
companies, albeit usually operating in Japan. And also to individuals recognized as having
made major contributions to the advancement of quality. The awards ceremony is broadcast
every year in Japan on national television.
Two categories of awards are made annually, the Deming Prize for individuals and the
Deming Application Prize.
QUALITY SYSTEMS
ISO 9000
ISO 9000 is a family of standards for quality management systems. ISO 9000 is maintained
by ISO the International Organization for Standardization and is administered by
accreditation and certification bodies. The rules are updated, as the requirements motivate
changes over time.
Some of the requirements in ISO 9001: 2008 (which is one of the standards in the ISO 9000
family) include
A set of procedures that cover all key processes in the business.
Monitoring processes to ensure they are effective;
Keeping adequate records;
Checking output for defects, with appropriate and corrective action where necessary;
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Regularly reviewing individual processes and the quality system itself for effectiveness;
and
Facilitating continual improvement
A company or organization that has been independently audited and certified to be in
conformance with ISO 9001 may publicly state that it is ISO 9001 certified or
ISO 9001 registered Certification to an ISO 9001 standard does not guarantee
any quality of end
products and services, rather, it certifies that formalized business processes are being applied.
Although the standards originated in manufacturing, they are employed across several types
of organizations A product in ISO vocabulary, can mean a physical object,
services or
software
ISO 9000 includes the following standards:
ISO 9000:2005 Quality management systems Fundamentals and vocabulary describes

fundamentals of quality management systems, which form the subject of the ISO 9000
family, and defines related terms.
*ISO 9001 : 2008 Quality management systems Requirements is intended for use in any
organization of size, type or product (including service) it provides a number of requirements
which an organization needs to fulfill to achieve customer satisfaction through consistent t
products an d services which meet customer expectations. It includes a requirement for
continual ( i.e. planned) improvement of the Quality Management System, for which ISO
9004 : 2000 provides many hints.
This is the only implementation for which third party auditors can grant certification. It
should be noted that certification is not described as any of the needs of an organization as a
driver for using ISO 9001 presentation can be found here ISO 9001 a practical Guide to
Implementation.
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ISO 14000
The ISO 14000 is a standard for environmental management systems that is applicable to any
business, regardless of size, location or income. The aim of the standard is to reduce the
environmental footprint of a business and to decrease the pollution and waste a business
produces. The most recent version of ISO 14001 was released in 2004 by the International
Organization for Standardization (ISO) which has representation for committees all over the
world.
The ISO 14000 environmental management standards exist to help organizations minimize
how their operations negatively affect the environment. In structure it is similar to ISO 9000
quality management and both can be implemented side by side. In order for an organization
to be warded an ISO 14001 certificate they must be externally audited by an audit body that
has been accredited by an accreditation body. In the UK, this is UKAS certification auditors
need to be accredited by the international Registrar of certification Auditors. The certification
body has to be accredited by the Registrar Accreditation Board in the USA, or the National
Accreditation Board in Ireland.
ISO 9000: helps companies determine which standard applies.
ISO 9001: Outlines the guidelines for companies that engage in design, development,
production, installation, and servicing of products.
ISO9002:- Similar to ISO 9001, but excludes companies engaged in design and development.
ISO 9003:- Covers companies engaged in final inspection and testing.
ISO 9004:- guidelines for applying the elements of quality management system
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Module-8
CONTROL CHARTS
Control charts are statistical tools employed by organization to measure any deviations in
the process of manufacturing or servicing.
Types of control charts
There are two types of control charts
1. Control charts for variables
2. Control chart for attributes
Control chart for

variables 1. Mean
range chart
Control chart for attributes
1. np chart
2. P chart
3. C chart
4. U chart
Mathematical constant value
Sample size
A2
D3
D4
1.880
3.267
1.023
2.575
0.729
2.282
0.577
2.116
10
0.308
1.777
15
0.223
1.652
20
0.188
1.586
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TYPES OF CONTROL CHART
Sample size
Parameter
chart
Constant
Defective
np
Variable
Defective
constant
No. of defects
Problems
1. Construct mean and range chart for the following data
Sub group number
Mean
Range
6.36
0.10
6.38
0.18
6.35
0.17
6.39
0.20
6.32
0.15
6.34
0.16
6.40
0.13
6.33
0.18
6.37
0.16
10
6.33
0.13
11
6.32
0.18
12
6.30
0.10
13
6.34
0.11
14
6.39
0.14
15
6.34
0.17
16
6.36
0.15
17
6.35
0.18
18
6.35
0.13
19
6.34
0.18
92
Mean chart
A2 0.73
D3 0
D4 2.28
Cl =127.03/ 20 =6.35
LCL = 6.35-0.73(0.153)
=6.35-0.111 =6.239
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R= 3.06/20 =0.153
UCL = 6.35+0.73(0.153)
=6.436
R chart
CL = 0.153
UCL = 2.28(0.153)
=0.348
LCL =0
CONCLUSION: since all the observations of mean are well within t6he range,
therefore it is homogenous.
2. Draw mean range chart for the following

data Sum of means of all samples = 585
Sum of ranges of all samples =410
No of samples =20
Sample size =
5 A2 =0.58
D4 =2.28
D3 =0
93
Mean chart
CL =585/20 =29.25
LCL = 29.25-0.58(20.5) =29.25-11.89 =17.36
UCL =29.25+11.89 = 41.14
Range chart
CL =20.5
LCL =0
UCL =2.28(20.5) =46.74
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3. An observation was conducted for particular team and the corresponding data is
furnished below
Sub group no
Sample1
Sample2
Sample3
Sample4
20
22
25
24
18
23
20
26
24
25
22
20
23
21
26
24
24
25
24
21
Construct mean range chart for the data

A2=0.73, D4=2.28, D3 =0
SAMPLE NO
MEAN
RANGE
22.75
21.75
22.75
23.5
23.5
Mean chart
CL =22.85
LCL =22.85-0.73(5.4)
= 22.85-3.942
= 18.91
UCL =22.85+0.73(5.4)
=26.79
RANGE CHART
CL =5.4
LCL =0
UCL
=2.28(5.4
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) =12.31
Since all the observations of range are well within the range, it is homogenous.
4. Construct an appropriate chart for the following data
Sub group
Sample size
No of defects
15
28
41
26
26
35
40
24
10
10
38
C CHART
CL =28.3
UCL =28.3+3(5.319) =44.25
LCL =28.3-3(5.319) =12.34
SINCE ONE OF THE OBSERVATION IS LESS THAN LCL, IT IS HOMOGENOUS
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5. 10 samples (each of size 100) of a component were inspected. The results of

the inspection are given below.
Sample no
No of defectives
10
np chart
CL =100(0.019)=1.9
UCL =1.9+3(1.3652) =5.99
LCL =1.9-3(1.3652) =-2.19
Since all the observations of np chart is well within the observations therefore it
is homogeneous.
6. Last weeks visual inspection carried out to find defectives. In manufactured item
revealed the following data for a sample size of 30. This week 30 pieces were again
inspected on each of two occasions and 6 pieces and 9 pieces were found to be defected in
each case respectively. Determine whether the process is statistical control or not?
Sub group no
No of defectives
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4
10
11
12
13
14
15
16
17
18
19
20
Np chart
CL =30(0.168) =5.04
UCL =5.14+6.143 =11.18
LCL =5.04-6.143 =-1.103
Since all the observations of np chart is well within the observations therefore it
is homogeneous and statistically under control.
7. For the following data construct a fraction defective chart
Group no
Sample size
No of defectives
32
0.06
32
0.09
50
0.06
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4
50
0.04
32
0.03
18
0.05
50
0.04
50
32
0.06
10
32
0.03
P CHART
CL =0.046
For sample size 32
UCL =0.046+0.111 =0.157 LCL =0046-011= -0.064
For sample size 50
UCL =0.1347
LCL =0.046-0.0887 =-0.042
For sample size

80 UCL =0.1157
LCL =0.46-0.0697 =-0.023
Since all the observations of P-chart is well within the observations therefore it
is homogeneous and statistically under control
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OPERATIONS MANAGEMENT

Production process Make or Buy

Exponential smoothing with trends,

Introduction and Break even analysis

FACTORS AFFECTING PRODUCTION AND OPERATIONS:a) Reality of Global competition.

Productivity measures includes:a) Labour productivity

Competitiveness: - Competitiveness is a crucial factor in determining the survival and growth of

CV (Total variable cost)

Application of Break- Even analysis

Break Even Volume

b) Evaluating alternative Processes

Fm = Fixed cost for make option

Total cost (buy)

Break-Even analysis for Multi product cases

Wi = Percentage of sales of 1th product of Total Sales.

Major Process Decisions:

MANAGERIAL USES OF BREAK-EVEN ANALYSIS

Managerial Decision making is often complicated due to an element of uncertainty in

Random (short-term effect)

Seasonal & cyclical

Long-term trends &

Collective opinion , Time

Revising qtly production

Annual production plan,

plan, rescheduling supplies

Technological Forecasts: - are concerned with rates of Technological Progress.

b) Economic forecasts: - are statements of expected future business conditions published by

Time series Model

Jury of Executive opinion Sales

force composite Method Market

Research Method Delphi

Exponential smoothing Correlation

a) Jury of Executive Opinion: - It is a forecasting Technique in which the opinions of a

Advantages:1. Uses experience and knowledge of experts.

4. Can be used to modify existing forecast to account for unusual

Disadvantages:1. It is costly process.

This is more practical, realistic and updated information.

It helps in Inventory Management, distribution and sales force staffing.

It may affect the sales forecast.

Sales people may be overly influenced by their recent experiences.

Market Research Methods (Consumer Survey Method)

Disadvantages:1. It is time consuming.

3. The response rate for Mailed Questionnaire is very poor.

This method can be used for long-range forecast product demand.

A panel of experts may be used as participants.

Process can take a long time.

Responses may be less Meaningful.

High accuracy may not be possible.

Poorly designed Questionnaire will result in ambiguous or false conclusions.

Moving averages Method:(i) Simple Moving average.

Demand in previous n periods

This periods forecast.

Actual Demand for the period.

Ft = F t-1 + (A t-1 + F t-1)

A t-1 = Actual Demand for the previous period.

= exponentially smoothed forecast.

= exponentially smoothed trend.

Ft = (At-1) + (1- ) (F t-1 + T t-1)

(Ft Ft-1) + (1- ) (Tt-1)

FE= Actual Demand Forecast Demand.

Mean Absolute Deviation (MAD)

MONITORING AND CONTROLLING FORCASTS